What We Wish You Knew About Real Estate…. Pre-Qualifications, Pre-Approvals & Proof of Funds

Real Estate, Uncategorized 8 Minutes

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Being an active, working Realtor here in Texas, one of the many questions I get asked is about getting pre-approved prior to finding a home and why that’s important.  Admittedly, this question most often comes when I get a phone call from one of my signs or marketing and the person on the other end wants to see a house.  The conversation goes a little something like this: “Hi Emerald, I’d like to see this house!” And my reply is as follows, “Great!  Just send me over your pre-approval letter if you’ll be getting a loan or your proof of funds if you plan on paying cash for a home.”  This is usually met with something like the following, “Why do I need to send you anything? I just want to see the house, and if it’s what I want, I’ll jump through all those hoops.”Well, that’s understandable from the caller’s point of view, but here’s why that doesn’t work:

“Why do you need all that, if I just want to see the house?”
Why it matters to the buyer:
As a buyer, you’re excited!  You’ve made the big decision to either begin homeownership or change your scenery with a new home. You’ve watched HGTV and looked at houses on websites, had lots of discussions your significant other, or your pet, about what your “must haves” are and what part of town you want to be in.  And just now, you’ve driven by this cool looking house in a neat neighborhood and so you call the sign because you want to see it.  Problem is, this Realtor on the other end is hassling you for paperwork?!  Why does she need all that?  “Just unlock the door house monkey, it’s your job!”
Yes, you’re right, it is my job to unlock doors, but it’s also my job to make sure you’re looking at homes you can afford.  If you’re calling on my sign, it means I work for the seller, so it’s my responsibility to make sure their home is being shown to qualified buyers.  If you’re calling because you found my number another way, through marketing, or this blog, or a friend, and I am representing YOU then it is my responsibility to make sure you are being shown homes that you can get a loan on.  This last part is important for 2 reasons.  First, there is nothing in the world sadder than watching someone fall in love with a home only to be told they cannot afford it.  Every other house after that house will just not measure up and you’ll hate the process, the lender, your boss, your bank account, your credit score and lastly, me, because you can’t have what you want.  I really don’t want to see you go through that.  So it’s my job to protect your time and sanity by getting you with a great lender who can get you pre-approved for a loan amount that suits you and your budget before the house hunt starts.
Second, the housing market conditions in which we currently find ourselves simply do not allow for shooting first and asking questions later.  What I mean is that, if you put in an offer on a home here in DFW right now, it’s likely that you’re not the only one.  Most homes sell with multiple offers received and the seller picked the best one for them.  While picking the best one, the offers and the buyers making those offers went through a rather extensive vetting process, not the least of which is calling each of the buyers various lenders and checking their pre-qualification and pre-approval letters.  Bottom line, if your offer doesn’t have at least a pre-qualification letter to accompany it, no matter how good it is, it likely won’t get a second look by a savvy seller, or a seller with a savvy agent.  You’ve lost the race before the starting gun was fired, heart-break.  All things that can be avoided by simply getting your pre-qualification, pre-approval, or proof of funds letters to the agent ahead of time.
Let’s run a hypothetical.  When you don’t get pre-approved first, and you put an offer on a house, if it were to get accepted, what would you do if you found out you don’t qualify for a loan?  Well, if you’re lucky, you might find out fast enough to be able to back out without it costing you thousands, but you still don’t get the home you want.  If you’re not lucky, you might find yourself in court being sued by an angry seller who has had their house off the market for weeks waiting on you to get your act together on top of being out thousands of dollars and losing the home you want.**  By getting pre-approved with a lender before hand it saves you from this scenario and it could potentially save you money as well.
Let’s run another hypothetical.  Let’s say you do call your lender or Realtor who puts you in touch with a lender and they run your credit and do your verifications and background checks and discover your credit score is not as awesome as you thought.  You now have options!  You can put off your home search for a bit, fix up your credit score, maybe save a bit more money and then, you might get a better interest rate, saving you money. Perhaps, even allowing you to qualify for a bit higher of a loan!  Win!
“What’s the difference between pre- approval & pre- qualification?”
I’m glad you asked!  Pre-qualifications are issued based on information given when a lender has spoken with a potential buyer and that buyer has filled out a loan application.  Pre-qualification letters are a good start but not as strong as pre-approval letters because the pre-qualification is just the beginning stages of loan approval.  There are many verifications that a buyer has to go through in order to be full approved for a loan, but a pre-qualification is where it all starts.  If you have a little more time and a lender that can send your file to their underwriters for verification, you can get a pre-approval letter.  A pre-approval letter signifies that the buyer has provided all required loan documentation and has past the initial review process by the mortgage company’s underwriters and processors.  Basically, it means the buyer is good to go and the only reason they don’t have a loan right now is because they haven’t found a house yet.  Final loan approval is only given once the lender is given an executed contract to purchase a home and said home has been appraised and is in satisfactory condition.  (I’ll do a section home condition in another post, that’s a whole ‘nother can-o-worms.)
 

 

“But, Emerald, I’m a cash buyer, so why don’t you just open up the house?”
A cash buyer is not as rare as you might think.  More and more people are electing to do away with the middle man and save money on mortgage fees and interest rates by paying cash for their home, and that’s fantastic!  Paying cash for a home opens all kinds of doors and saves all kinds of time and money.  But that’s another post for another day, right now, we need to answer the question of  “why do you need proof I have cash?”  Simply put, it’s my job to verify you are who you say you are and you have the money to purchase the home.  It’s a liability for the seller to have people in their home and so, they only want to show to serious buyers.  Cash buyers need to have their proof of funds ready before they try to set up an appointment with a listing agent or a buyer’s representative agent.  What are proof of funds?  Usually, the most recent bank statements that show you have at least the asking price of the home you are wanting to see will suffice, but they can also be money market statements, or statements from other financial investment accounts.  ALWAYS BLACK OUT ACCOUNT NUMBERS!!  The agent doesn’t need this. (Nor should they want it!)  If they say they do need account numbers, hang up and call another agent. (Preferably, me!)  The proof of funds statements should have your name, the bank or financial institution name, address and phone number, the appropriate dollar amounts and be dated within the last 30 days.  The agent will then call the bank or investment firm and verify the validity of the document.  It’s a simple process that protects everyone involved.

 

“Why is she asking for all this?”
From the Realtor’s Perspective:You know you’re a good person.  You likely even know what price range will work for you and your budget.  You’ve probably even been to a bunch of open houses and think the house you are calling on really is perfect for you.  But the person on the other end of the phone, likely doesn’t know any of that.  Part of the way Realtors protect themselves and their clients is through vetting potential buyers.  It’s not personal!  I promise! I do it to everyone, my own friends and family included, and I know them really, really well.  I protect my buyer’s time, my seller’s time, and my time by getting letters from lenders and proof of funds from banks.  I also protect myself in this way.  When I get a call from someone who has seen my number on the internet somewhere, I have no idea who I am speaking with or what their intentions are. However, if they are willing to speak with a lender, and get pre-approval letters to send to me, it’s a pretty good bet they aren’t interested in doing anything other than buying a house.  It’s a hard thing to write about, but it’s a very real part of my day-to-day life.  It’s not the only thing I do to help ensure my safety, but it’s a pretty big first step.
 

The Take AwayThere’s a lot to learn and know before buying a home, and that’s why having someone in your corner that knows the market and knows you is so very important.  I tell all my clients the same thing, if you’re getting a loan, buying a home will likely be the most invasive process of your life outside of applying for upper level government clearances or a getting colonoscopy. Mortgage companies and lenders get in your Kool-Aid.  But if you’re being asked to furnish documentation, I promise there’s a good reason.  I’m not saying you should blindly furnish documents to just anyone, so if you have questions, always ask.  Do your homework on the agent, and the lender, google them, ask for references!  But also, know that if you have the right team, you’re on your way to a successful home-buying experience.  Whether you use me or another Realtor, I want you to love your home and the home buying experience, so feel free to ask me questions.  Questions give me purpose, plus, I just really love talking about real estate!

Happy Hunting!

 

Emerald Scott, Realtor,
EXP Realty LLC, Dallas/Fort Worth, TX
Emerald@emeraldsellshomes.com* 214-533-8191
 ** I am not an attorney and cannot give
legal advice.  **
(But I know some good ones if you want
recommendations)

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