Helping Washington State homeowners learn more about their mortgage options.
My clients and readers ask such great questions…I just received this one from one of my clients that I’ve been working with since June of this year:
“…with all the rate changes how is our pre-approval looking? It the original amount still applicable?”
Yesterday I was interviewed by Melinda Fulmer for a MSN Real Estate article. Here were a few of my pointers (with some clarification) for buyers:
1. Plan on having a down payment. FHA allows for a reduced down payment which can be gifted or loaned by family members, as does USDA and VA. However I do like to see those shy on savings practice making mortgage payments to a savings account until they have at least 6 months of mortgage payments “in reserves”. This account is not to be used for your down payment–it’s in case of an emergency.
2. Be picky when selecting your loan originator. I do believe in getting referrals from people you financially respect. You can also try “googling” their names to learn more about the loan originator and their qualifications.
Borrowers may be better off working with loan originators who have are able to provide FHA loans–even if they’re not considering FHA financing. Many conventional loans are having to switch to FHA financing as the underwriting is more forgiving and rates may be better depending on mid-credit scores.
3. Get prequalified as soon as possible. This is a good way to get to select your loan originator (this is not the same as a preapproval). During this stage, you’ll be able to see how detailed oriented the LO is what their personality is like–what type of programs do they recommend. A LO should provide you a Good Faith Estimate without any commitment from you.
4. Rate lock strategy. Ask your LO what they can do if rates improve after you lock. Right now, with the turbulent markets, many lenders are offering free rate float downs as long as the lock meets specific criteria. This provides borrowers with the assurance that the rate will not be higher than the current rate lock and that should rates improve, they may have the opportunity to “float down” to that rate. Do make sure to obtain a written lock confirmation.
For sellers, I suggest that they insist on a preapproval letter to be included with their offer. They should also carefully read the letter, it should address the buyer’s credit, income/employment and where the down payment is coming from along with the type of loan they’re approved for. Preapproval letters are sadly not worth more than the paper they’re written on, however they can provide you with some clues about the lender the buyer is working with. If a seller has two identical offers, the buyer’s lender can make a huge difference in whether or not the transaction closes smoothly.
The preapproval letter is a tool typically drafted by a loan originator to be used by a buyer’s real estate agent when presenting an offer on a property. The letter may be in the form of a certificate or be an actual letter on the lender’s letterhead. The preapproval letter is intended to assure the seller and the listing agent that the buyer has been buyer has been approved by the lender and therefore accepting an offer from this buyer, there should ideally not be any financing issues with the buyer.
When I prepare a preapproval letter, it usually contains the following (depending on the program):
If these items have not been actually verified with proper documentation, then a buyer has been prequalified—not preapproved. BIG DIFFERENCE. Being prequalified essentially means that a verbal interview has been conducted without providing all of the necessary supporting documents (pay stubs, W2s, bank statements—again, depending on the type documentation required for the specific loan “full doc” to “no doc”). In addition, a Good Faith Estimate does not constitute a preapproval, it does detail the proposed loan scenario.
The preapproval letter does not contain private information such as a buyer’s credit score or their additional assets. It is a sales tool for the buyer’s agent and if there are multiple offers presented on a home, having a strong preapproval letter is an advantage. This is one reason why it is crucial for buyers to become preapproved before they begin shopping for their next home. Many listings agents will not even consider an offer unless the buyer has been preapproved.
The preapproval letter is generally effective for 90 days a specific amount of days, typically when most lenders consider the credit report “expired”. Updating a preapproval letter is simply re-running the credit and possibly obtaining most recent income and asset documentation (paystubs and bank statements). On occasion, the buyer’s agent may request a revised preapproval letter if they are presenting an offer on a home that is priced for less than what the buyer is approved for and if they are asking for closing costs.
Real estate agents may also consider who the preapproval letter is from, and they may contact the lender to confirm the buyer is indeed prepproved and not just prequalified. Many agents will tell you that the preapproval letter is only worth the paper it’s printed on. This is also why it’s very important to be selective with lender you work with…it could possibly impact whether or not your offer is accepted on your next home.
If you’re considering purchasing a home located anywhere in Washington state and need a preapproval letter, I’m happy to help you!
EDITORS NOTE: This post has been updated since credit reports are no longer “valid” for 90 days with most lenders.
Rhonda Porter is a Licensed Mortgage Originator MLO121324 living in the greater Seattle area. Rhonda began her career in 1986 in the title and escrow industry and began her mortgage career in 2000. She enjoys helping people understand the mortgage process and started writing The Mortgage Porter in late 2006. Read More…
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