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I'm in the infancy of buying a residential property. I have a credit rating of EXCELLENT. Do I need to get a preapproval mortgage letter? I thought that getting preapproved would expedite the process, since the lender would have already checked my background, which means it would take less time to complete the purchase of the property.

Note: This applies to the United States.

Thank you.

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3 Answers

up vote 6 down vote accepted

Preapproval letter means that given what you've told the lender is true, the lender will lend you X dollars under Y terms.

You need to get it because the sellers will likely to ignore you without it. But it doesn't mean you've been approved. You've been pre-approved, which doesn't mean all that much. Its a basic sanity check for the sellers that you are in fact capable of talking to a lender, and for you that a lender will in fact talk to you.

From my experience, to get you pre-approved they'll pull your credit, and take your word on anything else (income, assets, etc). They do not check much, and it doesn't shorten the approval time a slightest bit. Once you have a deal and you want to close, that's when the actual approval is going to happen, and everything you've told the bank to get pre-approved will be checked and verified by the underwriters.

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Thank you. I may have to create another question for this follow-up; during the approval process, will the lender, again, pull my credit, a hard inquiry? For example, a Wells Fargo agent said that their potential preapproval letter is valid for four months. If the approval begins two months after the letter was issued, will they pull my credit again? –  user717236 Oct 4 '12 at 5:13
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@user717236 they probably will. –  littleadv Oct 4 '12 at 5:15
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When the market was booming preapproval was virtually required. When there are multiple offers coming in to the seller, not having preapproval would get your offer ignored.

What was worthless was prequalified. This process just asked for you to provide numbers, absolutely no checking was done, and no credit check was done.

Preapproval does have some value for the buyer because they require you to gather all the required documents: pay stubs, bank statements, IRS forms. Just getting those documents in place now, will prevent you from wasting time in the future. If you are honest in everything you provide, it will mean that you will have a good understanding of what you can afford. The lender will be able to accurately calculate the monthly payment you can afford, and that via the interest rate can translate into the maximum price you can pay.

The preapproval letter should not mention the maximum loan you can get, because that weakens your bargaining position.

Preapproval does speed the process of final approval because they have already been through the process with you. They will be double checking their calculations, and will be looking for changes. Did you buy a car since the preapproval? Did somebody switch jobs?

They might even do one last check a few days before settlement.

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Yes, you always need a preapproval unless you can pay cash. Reason is, since the market is improving, demand for housing is increasing and the supply is down, you will want to show your intent to buy to any seller that you send an offer to. Granted, this is not manditory, but I can say from experience being a Real Estate investor in Colorado that you will not stand a chance without one.

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Welcome to the site @wowc8, good answer! –  C. Ross Oct 5 '12 at 15:18
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