Pre-Qualified May Be a Lie, Pre-Approved Might Be a Ruse!
Mortgage News from Quicken Loans
You did what they told you was impossible. You got an offer on your home in just a few weeks. They said you couldn't do it. Homes in your area sit on the market for months. Years, even. But you got the offer you wanted and accepted it!
Your new environmentally-friendly lawn, the home staging, the steps you took to keep your house bug free, and the way you minimized the effects of your dogs on your house really paid off. You were so confident you even took down the sign and immediately went out and put your own bid on the dream house you found in your new neighborhood. It's a picture-perfect end to what should have been a long and frustrating story, right? Wrong. The frustrations have just begun because your buyer's offer fell through when their approval fell through.
You see, that pre-qualification letter their real estate agent showed you and promised would make them an eligible buyer wasn't really worth the ink and paper it was printed on. Pre-qualifications are based on what the buyer tells the lender. Nothing (as in income, assets, debt, etc.) is verified and a pre-qualification letter pretty much states how much a buyer will hopefully qualify for. That's it. It's like a wish list for getting a mortgage.
Relying on a pre-qualification to find a potential buyer can cause some headaches. It's all too common for deals to die days before closing because buyers can't actually qualify for what they think they can. That's exactly what happened to David Binkowski, a word of mouth marketing executive in New York City.
"We got an offer, accepted it and thought it was a done deal. We started getting ready to move out of the house and then we got the call," Binkowski said. "[The buyer] couldn’t qualify for the offer they put in. And that was despite the fact they pre-qualified for more than that amount. It was frustrating, to say the least."
A good way to avoid the perils of a pre-qualification is to get a pre-approval, which goes one step beyond a pre-qualification. A pre-approval requires a credit pull, which includes the credit score and credit history of the buyer. The lender can use this information to make a good assessment of how much the buyer qualifies for. However, pre-approvals also have a negative side. In the case of issuing a pre-approval, most lenders don't verify income, assets, or debt. This could allow a person with great credit to be pre-approved for more than they really could qualify for once all financial information is processed.
The best way to overcome any shortcomings of pre-approvals is to work with lenders who issue full pre-approvals. In other words, lenders that offer these will pull credit, verify income, verify assets and check debts. By doing this, the lender pretty much guarantees how much the buyer can qualify for. Keep in mind that adding debts or losing income after a full pre-approval is granted can ultimately lower the amount of mortgage the buyer will get. But if nothing changes, a full pre-approval is pretty much as good as cash -- as in "cash buyer," which typically ups the buyer’s appeal to the seller.
Whether you are selling or buying, knowing the differences between pre-qualification, pre-approval and full pre-approval is very important. This is especially true when you are selling, as you may want to accept a slightly lower offer from a fully pre-approved buyer over the offer of a buyer with a pre-qualification or a normal pre-approval.
Not knowing if you or your buyer can qualify for an offer can cause anxiety and frustration. But by working with a lender who takes the time to really figure out how much a buyer qualifies for, you can be better assured that your house will sell or your offer will go through on your new home.
This article is reprinted by permission from Quicken Loans © 2007 Quicken Loans Inc. All rights reserved.
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