Tuesday, January 22, 2008

Financing Letters - Pre approval

In the old days we Realtors sat down with our customers and calculated how much mortgage they could afford. The Realtor asked about credit, Income, job history, debt, credit cards.

We would take a little worksheet and figure out what our buyer could afford. When the offer was written and accepted the buyer would apply for financing. Usually this would be "our" loan officer.

I'm not sure when the change occurred, but I remember concern that banks wanted to become the origination point of the real estate transaction. The idea was that buyers would go to the banker first and banks would tell the customer which Realtor to use. Banks would control the real estate market. Realtors didn't like that idea.

Some buyers now go to the bank before looking at homes. Sometimes they use a bank suggested by the Realtor and sometimes they have a bank they are comfortable with before they meet the Realtor. As far as I can tell, the banks have not taken over the real estate market.

An old friend once told me. "Hire painters to paint and bankers to bank and don't take stock tips from your painter." Your financing is a little bit like that. Your Realtor can set you on the right financing path. We have good general financing information, but in our specialized world it is the lenders job to tell you what you can afford.

What the Realtors used to do was called "pre-qualifying". There were no guarantees connected with it but it gave a pretty good approximation of what you could afford. Today lenders may prequalify you and even give you a prequalifying letter to present with an offer.

Now a days there is another step that comes after qualifying called pre-approval. Pre approval means your request for financing is submitted to the "underwriter" and approved. The underwriter is the person at the bank who looks over all of the information on the application and says "yes" or "no". They make sure that the loan request falls within certain guidelines.

Mere mortals like Realtors and buyers don't get to speak with underwriters. Like the all powerful OZ they can make the wishes of buyers and Realtors come true. Like the Wizard I am sure they are just normal people, could be the fellow next to you in the check out line at the grocery.

Sellers consider a pre approval letter to better than a qualifying letter. If you are truly pre approved, the only steps remaining are to find the house and for the appraisal to be done. The appraisal must show the home has a high enough value and is in good enough condition.

It should be noted here that we are in the middle of a change. I would guess that underwriters are under immense pressure to filter out potential bad loans, also some markets are declining in price. We may start seeing underwriters requiring increased down payments after the loan has been submitted.

It used to be common practice for lenders to request letters from buyers explaining details about their specific financial situation before approval. I wouldn't be surprised to see this come back.

If you don't have a pre approval letter yet, but you have some idea what you can afford, its okay to get started looking. Your Realtor can point you to a good lender. I would not delay on the financing however, most sellers expect some kind of financing letter to be presented with an offer.

When you find the house you want, everything can happen fast. You will be much more comfortable if you know your finances are in order.

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