FAIRFIELD COUNTY, Conn. – Many buyers don’t understand the difference between a mortgage pre-approval letter and a pre-qualification letter.
Many lenders or mortgage brokers will try to get your business by enticing you with a pre-qualification letter for you to give to your Realtor and to the seller of the home you want to buy. However, knowledgeable agents and sellers know that the pre-qualification letter is not worth the paper it is written on. Some lenders will issue one based solely on a phone conversation, with the borrowers verbally stating what their credit scores are, what they earn, owe and hope to spend on a house. News Flash: People Lie. The only person the pre-qualification letter benefits is the lender or mortgage broker who hopes to keep you as a client. Then, when it’s time for you to get your valid pre-approval, out comes the bait and switch – the rates you were offered, or programs that were available “then,” may not be available when you need them. Or, more likely, you may have given inaccurate information, accidentally or deliberately.
A pre-approval letter can be gotten through any bank or mortgage broker. However, if you are a Private Banking Client with either your own personal bank or financial institution, you may wish to explore that option first. Many financial firms such as Citibank, Wells Fargo and JPMorgan Chase will offer their best customers and/or employees the best rates and programs possible. Some also have strict policies such as you have to have kept a minimum balance in your account for the past X number of years, so get all the facts up front before you start your home search and lending process.
For a “real” pre-approval letter, this involves the verification of assets; debt; employment; income; bonuses and pay structure; and will take into full account your credit scores from the 3 credit reporting agencies. It means the lender has calculated your buying power, and your lending risk. The best pre-approval letters I’ve seen are those that are basically a mortgage approval, with the only outstanding condition being that the house you wish to purchase has to appraise to the selling price. It will also take into account whether you need to sell and close on your current home before buying, which needs to be stated in the letter. This is a big issue for sellers because you can understand the domino effect that could occur if even one of those dominoes fall. A pre-approval letter takes longer to get – up to two weeks in some cases – and it involves you in the process more by forcing you to provide the necessary documents for a loan in advance of offering on a home. But, it is the BEST way to proceed. As a listing agent, this is the only type of letter I will accept, and as a buyer’s agent, this is the type of letter I ask my clients to have in advance of our offer.
There can be a minimal cost involved to get that pre-approval letter, but many banks or mortgage brokers will defer that cost to closing. You will also be allowed to lock in an interest rate with a full pre-approval letter – something you are not able to do with a pre-qualification letter. With interest rates rising, this makes good financial sense for you. If you don’t find a house within the time frame the lender offers, you can ask for your pre-approval period to get extended. You can also ask for your rate lock to get extended, but that sometimes costs money.
I recommend contacting three lenders to see what lending programs and rates they offer. BUT, only get your credit report pulled once. Ask for a copy and then hand out that copy to the other lenders. Multiple inquiries will actually lower your credit score.
You also have the option of pulling your own credit report through a service such as freecreditscore.com, but the lender may need to pull another detailed report as well. However, if you have your own credit report in hand before speaking to a lender, you can check it for accuracy and fix any incorrect credit issues that may bring your credit score down, which could cost you big bucks with your loan. There are many agencies that help people repair credit, and in fact some lenders offer this service as well.