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Jaime LaJoice and his role in my home purchase made the transaction smoothe and effortless. He was very thorough throughout the whole process that included a dual seller/ buyer agency and preparing the paperwork for a 60 day lease after sale. He's quick to respond to my questions via phone or email so I never felt a disconnect during the transaction. Even after his role in the real estate transaction, he checked in after the lease after sale terminated to make sure the transition from landlord to home owner occupancy went according to plan. I recommend and will choose Jaime LaJoice for my next real estate transaction.

by Paul Kvicala, Jr.
Jamie's Realtor Blog

Is a Mortgage Pre-Approval Letter Necessary to Make an Offer on a House?

 | Aug 28, 2017

Is a mortgage pre-approval letter necessary to make an offer on a house? The short answer is no. However, if you want your offer to be taken seriously and to stand out from any competing bids, this little piece of paperwork can really give you the edge.

"While you do not 'need' a pre-approval letter from your lender in order for your offer to be accepted, I highly recommend all of my buyers present it," says Denise Shur, a Realtor® with 1:1 Realty in San Jose, CA. In fact, "I do not look for homes with my buyers until they have a pre-approval letter from their lender. To me, it's that important."

What is mortgage pre-approval?

Basically, a mortgage pre-approval letter is a guarantee from a lender that it's willing to finance your home purchase up to a certain dollar amount, based on financial info you've shared with it, such as your pay stubs and tax returns. Pre-approval should not be confused with pre-qualification.

For that reason, pre-qualification can be done instantly, while it can take up to five days to be pre-approved. So is seeking pre-approval a good idea for you?

2 times a mortgage pre-approval letter isn't necessary

The only buyer who definitely doesn’t require a pre-approval letter is one paying in cold, hard cash. Since this buyer doesn't need a home loan, sellers know that they can move forward without fear that lack of financing might hold things up, says Jane Peters, broker and owner of Home Jane Realty in Los Angeles.

Another time when pre-approval might not be necessary is if you're the ideal home buyer—meaning you've got a stable job and a solid credit history. This suggests you'll have no problem getting approved for a loan, so in this case, mortgage pre-qualification may be enough to please the home sellers and their listing agent, at least at the outset.

3 times a mortgage pre-approval letter is a must

Yet outside this thin sliver of all-cash offers and impeccable buyers lies a huge swath of people who really should get that mortgage pre-approval letter before they make an offer. See if you fall within any of these buckets below.

  • You're a less-than-ideal home buyer. If your credit worthiness is in any way questionable, getting pre-approval can really help put home sellers at ease. So if your credit history is spotty (say, a credit score below 640), you're self-employed, there are gaps in your employment or you have less than two years of employment history, "It’s advisable to take it a step farther and get pre-approved," says Ricamore.
  • You're in a hot market. With much of the country in a sellers’ marketwhen it comes to helping you stand out from all the other home buyers, “You need to bring out the big guns,” says Peters. Or in the words of Shur, "When the sellers see an offer with a pre-approval letter, they instantly have more confidence that you are serious, qualified, intend to close, and are on top of your game."
  • You're not sure how much house you can afford. “Our team has had people completely readjust their budget after getting a pre-approval and finding out that they were nowhere near the price range they had expected,” agrees Christy Murdock Edgar, a Realtor in the northern Virginia/Washington, D.C., market.

If you don't have a pre-approval letter, your offer should include a financing contingency, which binds you to this deal only if you can secure a mortgage. Such contingencies make sellers wary, since closing will hinge on a huge "What if...?" This is why you might want to strengthen your offer by arming yourself with this letter.

How to get mortgage pre-approval

If you're convinced you must get a mortgage pre-approval letter, make sure you get the best one possible, by shopping around.

"All lenders are not created equal; you’ve got to compare and contrast to find the right one," Ricamore says. "If you need to close quickly, you need a lender that can get it done fast rather than drag their feet. If you need to win a multiple-offer situation, you need a lender that the listing agent trusts." So be sure to ask your lenders questions like how long it will take to get pre-approved, and whether they've worked with particular real estate brokerages in the area where you're hoping to buy.

"One misconception I hear a lot is that if you apply for a mortgage with multiple companies, they'll pull your credit, and that will hurt your score," Ricamore notes. While it’s true that applying for a mortgage will impact your score, "Companies know that rate shopping happens," he says, and "credit inquiries for a mortgage within 30 days are only calculated as one inquiry for the same type of loan."

In other words, there are very few downsides—and many benefits—to getting this helpful letter in hand.

Tips for Smart Homeowners

5 Steps to Take Before Shopping for Your First Home

When you're considering buying your first home, you're probably full of excitement about achieving the American dream. Unfortunately, this dream could turn into a nightmare if you haven't made sure that you're financially ready for the costs of becoming a homeowner. You don't want to fall in love with a house before you've done the practical thing and made certain you're prepared for homeownership. Before you call a realtor, take these five steps to get all your ducks in a row.

1. Calculate what you can comfortably spend

The last thing you want to do is make yourself "house poor" by spending more of your income on a home purchase than you should. The "affordability standard" for housing is that you should spend no more than 30% of your income on housing costs (including insurance and property taxes), while many mortgage lenders prefer that your housing cost is no greater than 28% of your income.

Your outstanding debts can also impact the amount you can spend on a home. Most lenders want a total debt-to-income ratio -- including your mortgage payments and other debts -- to be around 36% or less, although you can still get a standard mortgage with a ratio as high as 43%.

This means if your income is $50,000, you could reasonably afford about $1,170 per month for your total housing costs if you stuck to the 28% rule -- assuming you didn't have a substantial amount of other debt that would push your total monthly payments above the recommended 36% of income. If we also assume you can pay 20% down and qualify for an interest rate of 4%, then you could potentially afford a home price of up to $250,000. That may or may not be a realistic price in your area, and you may want to aim lower if you have other sizable debts.

2. Save a down payment of 20%

In our example above, we factored in having a 20% down payment when calculating the price of the home you could afford. Paying at least 20% of the value of the home up front is vital, because it allows you to avoid private mortgage insurance (PMI). PMI insures your lender in the event that you're unable to make payments and the lender must foreclose on you. On a $200,000 loan, PMI could cost you $100 a month or more, depending on how much you paid up front -- and you could be paying it for several years.

You're stuck with PMI until you pay your loan down to 78% or less of the home's original value. Once you prove to your lender that you've reached that milestone, your lender is required to drop the PMI requirement. .

If you don't have a down payment, not only will you waste thousands of dollars on PMI and additional interest payments, but you'll also put yourself at substantial risk. When you make a 20% down payment on a home, the value of the house would have to fall more than 20% for the home to be worth less than you owe on it. If you only make a tiny down payment, however, even a slight downturn in the market could mean you're underwater -- i.e., your home is worth less than you still owe the bank. This makes it difficult or impossible to sell unless you can bring cash to the real estate closing for the difference between what your house sells for and what you still owe.

3. Save an emergency fund of three to six months' worth of living expenses

When you're a homeowner, you are responsible for everything that goes wrong in your house. Instead of calling a landlord when the furnace breaks or the pipes freeze, you have to call -- and pay for -- a repair man. If the problems are costly to fix, or can't be fixed, you're the one on the hook. If you don't have money set aside to cover maintenance, repairs, and replacements, then you'll have to use credit. You don't want to be paying interest on your new fridge for the next 10 years, so make sure you have an emergency fund to cover the many costs of being a homeowner.

Not only can an emergency fund help you pay for surprise repairs, but it can also ensure that you don't lose your home in the event that an illness, job loss, or other crisis puts a major strain on your household finances. If you cannot pay your mortgage because your income has taken a hit, you could be foreclosed on, lose your house, and end up with ruined credit. You don't want this to happen, so save up enough money to pay the mortgage for several months in case something goes wrong. 

4. Get pre-approved for a mortgage loan

When you have your financial house in order, it's time to prove to the bank that you're ready for the responsibility of taking on a mortgage. You want to get pre-approved by your chosen financial institution before you start shopping for a home. Getting pre-approved means you'll have a clear idea of what the bank will lend you so you don't shop outside of your price range. You'll also be taken much more seriously by real estate agents and any potential sellers to whom you make an offer. Some sellers won't even consider offers from someone who isn't pre-approved, because there's no way to know whether the financing will be available to complete the sale. 

If you want your bids to be competitive and you want to know you're shopping for houses that are priced right, provide your financial information to the bank before you start house shopping and get a pre-approval letter to take with you. 

5. Find a buyer's agent

Although you can technically buy a house without an agent, it's usually a bad idea to try it -- especially if it's your first home. An agent can help you spot red flags that should send you running away from a prospective home. Agents know the market and can help you make a reasonable offer so you don't overpay, and they can also guide you through the steps of the buying process, like getting a home inspection.  

You'll want to be sure you find a buyer's agent, rather than letting the seller's agent represent both you and the seller. A buyer's agent is focused only on your interests and has lots of experience helping homebuyers find the house of their dreams. If you've already made sure you're financially ready before calling a realtor, your agent can help you make the buying process low-stress and successful.


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