Buying a home is tough enough; navigating the competitive housing market of the Bay Area as a first-time homebuyer can be exceptionally daunting. Probably one of the most important parts of the home-buying process is getting pre-approved for a mortgage. In this blog, we're going to break down the three main levels of preapproval—prequalification, pre-approval, and full underwriting approval—and how each stage plays out on your home-buying journey.
1. Prequalification: The Initial Step
What is Prequalification?
The most basic type of mortgage evaluation is the prequalification. This usually tends to be a conversational process whereby you provide a lender with your financial information and income, assets, and debts without submitting formal documentation or undergoing a credit check. In other words, it's simply an informal evaluation.
Why This Isn't Enough in a Competitive Market
While getting prequalified is something of a quick and painless process, the resulting opinion counts for little when trying to make an offer on a home in a competitive market such as the Bay Area. No official documents are reviewed so sellers and their agents tend to disregard buyers who have merely been prequalified. In short, prequalification gives you a rough idea of what you might qualify for but does not guarantee loan approval.
2. Pre-Approval: The Next Level
What Is Pre-Approval?
Pre-approval takes it one step further. This involves applying for a mortgage formally. During this process, your lender does a credit check. Besides that, there is some extra financial information that you are expected to produce, such as earning statements, asset evidence, or documents on debt. Your loan officer will make a review of all these and show you how much you can borrow.
Strength of Pre-Approval
Unlike pre-qualification, a pre-approval letter is more reliable during offer making time. It makes the seller and real estate agent consider the pre-approved buyer to be a more serious contender because your financial standing has already been verified.
But remember, a pre-approval is still just the loan officer's interpretation of your qualifications. The loan has not yet been reviewed by an underwriter- this is the person who's going to eventually decide to accept or reject your mortgage. So although pre-approval does make your offer much stronger, it doesn't provide the assurance that sellers in competitive markets often crave.
3. Full Underwriting Approval: The Gold Standard
What Is Full Underwriting Approval?
Full underwriting approval is the most powerful form of mortgage approval. In this phase, your mortgage application has been underwritten, meaning the bank or financial institution has reviewed your financial documents, credit history, and your application. At this point, they have agreed to grant you the loan pending final details, such as the appraisal of the property and review of the home's title.
Why full underwriting approval is so important in the Bay Area
In areas like San Francisco and the Bay Area, which are highly competitive for real estate, full underwriting approval helps to put you at the top of the list for financed offers. Sellers prefer to minimize uncertainty, and when you are fully underwritten, you're in a much stronger bargaining position. The only unknown variable becomes the property itself, not whether you'll secure funding based on your personal financials.
The California Association of Realtors (CAR) even introduced a special box in the real estate contract where a buyer can check if they've been fully underwritten. This will make your offer stand out, especially in multiple-offer situations.
Overcoming Concerns on Pre-Approval
Afraid of Incurring a Hard Credit Inquisition?
Many buyers feel that they will be penalized when they pull their credit and are under the belief that this will drop their credit score. Although a hard pull does lower your score by a few points when done for loan approval, it now has less impact on consumers due to the introduction of soft credit pulls.
In the last 24 months, almost all lenders have switched to using "soft" credit pulls at the pre-approval stage. A soft pull does not display on your credit report and will not lower your credit score, but it still provides the lender with everything they need to make a decision regarding your creditworthiness.
This shift means that even if your home-buying process takes three or more months or even years, you don't need to worry that your multiple inquiries will hurt your credit. You'll be required to do a hard pull only once if you make an application for a mortgage while under contract to buy a property.
How Long Does Pre-Approval Last?
One of the most common questions is how long a pre-approval is valid. There may be some documents, like your last few pay stubs or bank statements, which you'll have to renew from time to time; provided your employment and income are stable, and debt, for example, hasn't changed appreciably, the pre-approval is valid indefinitely.
If you are simply beginning to think about buying a new home and are likely to purchase after the New Year, start the process of getting pre-approved now. This will provide you with a clear picture of your financial capabilities, and it will allow you to take care of problems, such as improving your credit score, long before you are in a position to make an offer.
Takeaways for the Homebuyer
Start Early: Don't wait until you feel that it is time to place your bid before you start applying for pre-approval. The earlier you become pre-approved, the more time you will have to improve your financial condition if necessary.
Be Ready to Opt for Full Underwriting Approval If Possible: You can make yourself a more attractive buyer and let the seller be assured of receiving sure financing from you in a competitive market if you opt for full underwriting approval.
Do Not Worry About A Hit To Your Credit Score: Thanks to soft credit pulls, there's no potential negative consequence of starting the pre-approval process early; you can get valuable financial insights without affecting your credit score.
Update Your Financial Documents When Necessary: Even though it may be quite some time before you need to buy again, your pre-approval remains valid as long as nothing changes about your financial situation. This might be simply updating some of the documents, perhaps recent pay stubs or bank statements along the way.
The earlier you complete the process and focus on full underwriting approval, the better your chances are of getting that dream home you want.
Comments