Pre-qualified vs Pre-approved
And why you NEED to have this done
As a preface to this newsletter, I wanted to be clear on what my goals are and what these weekly posts will entail. I am using this newsletter as a way to document my journey of learning the process of real estate investing, and basically dump all the information I have learned into this funnel. I am in no way trying to act as a “guru” or mentor. I am most likely in the same boat as a lot of you reading this, and I think that brings a lot of value. Most investing blogs and videos are all about those that have done it already and are at the top. I want this to be more relatable to the average person who wants to get started, and can follow along with my wins and losses!
In this week’s newsletter we’re going to talk about Pre-qualifications vs Pre-approvals, and why one basically means nothing. I recently went through this process, and want to share what I learned and how I would do it differently next time!
What are they?
When you are considering putting an offer on a home, it is very important to know how much you can afford, and what your ideal downpayment would be. This information is attained through your debt to income ratio, as well as other factors like assets, whether you have any dependents, and your monthly expenses. This is where Pre-qualifications and Pre-approvals come in.
Pre-Qualification
One way to get a vague idea of how much you can afford, is through a pre-qualification. This is basically where you give an overview of your financial situation to a lender, like income, assets, debts, and credit score, and they give you an estimated number of what you could potentially afford. However, most of the time no documentation is required, and the lenders just take your word for the information you relay. There are many issues with this process, as some people could be lying, or you may not know the exact numbers you are giving, or there could even be hidden liabilities that you knew nothing about. That’s where it can get dangerous for a seller that only looks at a buyers’ pre-qualification letter. They could accept an offer from someone, then a few weeks into the closing process, the buyer realizes they can’t actually afford what they thought they could, and the deal falls through. That’s a bummer for both parties, but the seller really takes the hit, as they’ve missed weeks or even months of market activity. In order to avoid the unknown of a pre-qualification, it is recommended to get a pre-approval.
Pre-Approval
When it comes to a pre-approval, the same information is required as a pre-qual, however documentation is required for most of it. Your bank statements are looked at, your balances, assets and liabilities are all to be reviewed. You also get a hard inquiry on your credit score to run credit as well. This takes away most, if not all of the unknown with lending. Your entire financial situation is looked at and confirmed, so you can be assured the number you receive is what you can afford.
When a seller is looking at multiple offers on their home, it gives them peace of mind to see a buyer with a pre-approval letter. They know this buyer is serious, and has been vetted to the highest extent. Although there can still be hurdles that come up during the closing process, this is the most secure offer you can give without being 100% cash.
Overview
When it comes to the home buying process, it is important to be honest with yourself (and any investors) about your goals during this time. If you set your expectations accordingly, it will be a relatively smooth and efficient process. If you are just winging it, and expecting to afford a specific price point without the proper due diligence, you may have a rude awakening when it gets to closing time. Being proactive during the search for lending is a great way to let sellers and agents know that you as a buyer are serious. This has a lot more of an impact on your offer than you’d think. So if you are in the process of buying a home, go get a pre-approval letter. It’ll get rid of any doubts you have, and keep you from falling in love with properties you can’t afford!
I hope you all enjoyed this weeks newsletter and took something away from it that you didn’t know before. As always if you enjoyed, feel free to share this with someone you know might be interested. You can also subscribe below if you want an extra newsletter every week that shows a full “Deal of the Week” analysis where I pick a property to analyze from start to finish!
Always learning! Thanks Ange!