Issue Date: August 2, 2006

First Things First: 5 Reasons to Get Pre-Approved

By Jody Zink
Licensed Realtor in Ohio & Michigan

The number of calls from home-seekers and first-time buyers who've given little thought to getting loan pre-approval perplexes me. Almost as much as learning that my recently acquired kitty cat I had proudly named Chloe was actually, a boy. (Okay, I thought it was a girl. I guess I couldn't tell the difference with the surgery.) I'm arguably better at explaining the difference between pre-approval versus pre-qualification. And that confusing the two can lead to dire consequences for the buyer.

A pre-qualification letter spells out what the buyer is qualified to spend and is somewhat informal. It states a ballpark figure you would qualify for based on what you've told the lender. It usually costs nothing and isn't binding. There is no or very minimal background checking with a pre-qualification letter.

A pre-approval letter is a bigger deal. You provide documentation: The W-2's the 1099's and pay stubs. It means the lender has checked out your employment, salary, credit, assets and debts. Some lenders charge for pre-approvals, some don't. A pre-approval is a commitment from the lender for the amount they're willing to loan and is often subject to the property chosen appraising out in value.

Before the home search begins, you'll want to get a pre-approved. It's beneficial in several ways.

1. Avoid heartache. By knowing how much you can spend up front, you won't be setting yourself up for disappointment. It's no fun to find your ideal property and then find out you can't afford it. Plus, once you find the house you want, you'll be ready to pounce.

2. Save time. Don't waste your time or your agent's. What good is it to look at homes that are out of your reach? Maybe, just maybe---you can afford more than you originally thought. (Hey, it could happen.) Spend your time wisely. The home you may fall in love with may have received an accepted offer an hour earlier. Homes sometimes have a way of getting unexpected attention. One I showed recently sat on the market for 5 months with no activity. Then, the same day my client wrote an offer, two other offers came in. Go figure.

3. Multiple offer situation. A pre-approval letter adds strength to your offer. Sellers are more likely to accept offers with pre-approval letters than ones that don't. And sellers with bank-owned properties typically require them.

4. Realtors prefer you get pre-approved. In fact, some agents won't work with buyers until they've proved they're qualified to buy. It helps get things off on the right footing.

5. Be informed. As painful as it may be, going through the pre-approval process forces you to get familiar with your finances. Think of it as financial confession. (A cleansing, perhaps?) You'll have an idea of what your monthly payment will be, allowing you to budget your money before making this large investment. It shows you what the down payment and closing costs will run so there are fewer surprises.

To my surprise, I learned that not only was my cat a boy, but that his name is Ted. He knows his name is Ted and he answers to Ted. He won't be getting pre-approval anytime soon, but he does get high marks for his affection for Cool Ranch Doritos and Thigh-Master motions while asleep .

Jody Zink is a licensed REALTOR in Ohio and Michigan with the Loss Realty Group. Her column appears every other week in the Toledo Free Press. She can be reached at jody@jodyzinkrealtor.com or 419-725-1881.