Owning a car and buying a home have always been the American dream. As a real estate broker, I am extremely happy when my clients buy homes. That is what a real estate broker does. However, in my view the decision on whether to rent a home or buy a home should depend on each individual’s situation. Some people who have just moved to a new town may want to rent for a while and get familiar with the city before they finally decide where they want to live. Some people who are starting or expanding their business may need to save their cash by temporarily renting a home. Some people who are just divorced may decide to rent and then buy a home when their life is more settled. Some people are young and single and have decided to not buy a house until they are married. Some people have bad credit or a bankruptcy in their background and need some time to improve their credit score. Some people are very busy with work and hobbies and don’t want to spend time and money maintaining a home. There are many different reasons why people may choose to rent rather than buy a home.
However, many people still consider owning a home to be the American dream and plan to buy a home when they are financially ready. They may consider buying a home once they start a family. There are also some people who have sufficient savings and excellent income who may buy a home even though they are not married and don’t have children. Buying a home or renting a home all depends on individual situations. As real estate and financial leaders and advisors, we should not steer people to buy or to rent. What happened in the 2008 economic and real estate crisis? Real estate and financial leaders and builders strongly encouraged people to buy houses that they could not afford. When more and more people buy homes, builders love it because they can build more homes and make more profits. Financial institutions, mortgage companies, and mortgage and real estate brokers also love it when people buy homes because that is how they make their living every day. Therefore, they push people into borrowing a lot of money and buying homes even if they cannot afford it. Fannie Mae, Ginnie Mae and Freddie Mac also contributed to the inflated market by lowering credit standards. Finally, it pushed the market to a point of economic crisis.
The best situation for people who want to buy a home is to have a steady job or a reliable income sufficient to pay their mortgage without straining their budget. They also need sufficient funds to make a down payment and still have enough savings for unexpected expenses before they consider buying a home. Of course, they should fulfill their dreams. If you have saved the necessary funds and are prepared to buy a home, the first thing you need to do is get a bank approval letter before you consider making an offer on a home. What is a bank approval letter? It is a document from a lender that prequalifies the buyer and states the lender’s willingness to lend the buyer up to a specified maximum amount for the purchase of their home. This document is based on certain assumptions and is not a guarantee that the lender will make a loan on a specific home, but it does provide a strong indication that the buyer has sufficient assets, credit score and income to purchase a home within a certain price range. Typically, the preapproval letter is good for 90 days.
A pre-approval letter will be a lot more meaningful to sellers because it indicates that you are a serious buyer and confirms that the mortgage lender has verified your financial information, including your credit history and debt to income ratio, and has confirmed that you are eligible for the specified loan amount. It is a powerful tool to help you get into your dream home. When you are making an offer on a house, you are far more likely to be successful if you are pre-approved.
What do you need to get a pre-approval letter? It is totally up to each lender to decide what documentation they require from you for the lender to issue you a pre-approval letter. Generally, most lenders will require you to provide the following documentation:
1. Proof of assets. Bank statements for checking and savings accounts, brokerage statements for investment portfolios, and any other documents that show your assets.
2. Proof of income. Paystubs, W-2s and sometimes tax returns. It is more challenging for self-employed people to prove their income and they may need to provide a greater range of documents and back statements.
3. Employment. Your paystubs help but they may require a letter from your employer confirming your length of service and that you are still on the payroll.
4. Identification. A government issued photo ID or your driver license.
5. Good Credit. Finally, the lender will check your credit score and analyze your payment history and debt-income ratios and decide the maximum that you can borrow. What constitutes a sufficient credit score varies significantly depending on the loan program. Remember: The higher your score, the lower the mortgage interest rate you are likely to pay.
These are the minimum requirements. A lender can ask for any additional documentation if it thinks is relevant to satisfy itself as to your suitability as a borrower.
What is included in a mortgage pre-approval letter?
1. Loan program: Whether you are getting a conventional, Jumbo, FHA, VA, USDA or some rural type of mortgage.
2. Loan type: Is it a fixed rate or adjustable-rate mortgage (ARM)? Will it last 30 years, 15 years or some other term?
3. Amount of the loan: This is the maximum sum you can borrow. However, you can borrow lower than the maximum amount.
4. Maximum purchase price: The total of the loan amount plus your down payment that can be paid for the home.
5. Qualified interest rate: The mortgage rate the lender is willing to charge you.
6. How long the offer will last: The date on which the letter expires.
It is important to note that your pre-approval letter is not actually a mortgage offer. Certain circumstances or events can change your credit score or impact your ability to repay a loan. The lender will want to verify that there has been no adverse change in your financial or employment situation before they provide a final loan approval. Remember that lenders want your purchase to proceed smoothly as much as you do, so it’s rare for them to pull an offer without a very good cause. A pre-approval letter does not mean that you are committed to get a mortgage loan from the lender. You can and should do a comparison shop among several lenders and find the best deal to finance your purchase. Each lender offers different incentives and charges different points, fees and closing costs. The pre-approval letter indicates the upper end of your price range, but you should feel free to shop below that.
How long does the pre-approval process take?
Some mortgage companies can complete the pre-approval process very quickly. If you have your documentation prepared and are ready to submit, you will receive your pre-approval letter right away. Some companies may take a few business days and may require that you provide additional documents. If you are self-employed or have unusually complex finances, it’s especially important that you take the time to get pre-approved.
Why do you need to get a pre-approval letter?
A pre-approval letter indicates that you are a serious buyer and have the ability to purchase the property. However, for sellers and realtors, the most attractive types of offers are ranked as follows:
1. All-cash offers. Some buyers will want a copy of a bank statement or a letter from your bank confirming that you have the cash needed to purchase home.
2. Offers with a mortgage pre-approval letter.
3. Offers with a pre-qualification letter. Here note that pre-qualification letters are different from pre-approval letters.
A mortgage pre-qualification letter is a quick and easy alternative to a pre-approval letter. For example, you have a bank statement indicating that you have $500,000 cash, you immediately can get a pre-qualification letter from the lender. A mortgage pre-qualification does not cost you anything; the lender takes your word and does not independently verify the information regarding your assets, liabilities, income, employment, etc. that you provide in your application. Both pre-qualification and pre-approval letters are not guaranteed loan offers. Generally, a cash offer has an advantage because the purchaser can close the purchase quickly and already has the funds needed to buy the property. Therefore, the sellers and realtors will first consider a cash offer even though other offers which require a mortgage loan may be for a slightly higher amount. However, which offer will be accepted ultimately depends on the seller. A pre-approval letter certainly has advantages to beat other offers.
When you are ready to buy a home, spending the time and effort to get a pre-approval or pre-qualification letter may make all the difference in getting your offer accepted and closing on your dream home.