In the last few years, we've all heard the news: All-cash buyers are flooding the market; unless you can buy outright, stay out of the market. Well, there was some truth to this until recently, but only really if you were looking at properties valued over $2 million. Even at the peak of the all-cash-buyer phase, most purchases still involved financing. So what if you are one of the majority that needs financing... well the first step is contacting a mortgage professional and getting a preapproval letter.
In order to make an offer where some part of the purchase price will be financed, a buyer will have to submit a preapproval letter. It could take a few days to gather the documents necessary to present to a bank, and the bank will have to review and verify the buyer's financial profile before issuing such a letter. Thus it is important to have started the process of obtaining a preapproval letter with a mortgage professional very early in the process.
A preapproval letter states that the lender's representative has reviewed the financials of the buyer/borrower, and that the potential borrower has met all conditions for lending up to X amount. In reaching this determination, the potential borrower has to fill out lengthy forms, submit to a credit check, and provide documentation of assets, salary, debts, etc. Gone are the days (at least for now) of the pre-meltdown "no-doc" loans with 2% down.
The relationship with the mortgage professional is ongoing. The initial prequalification will state some approved amount. But what if the potential borrower/buyer sees a perfect property and wants to put an offer in that's higher than the initial preapproval amount? Well, based on certain apartment-specific factors (like if there is unusually low monthly maintenance), the pre-approval could be increased, and a subsequent letter issued. Similarly, if the potential borrower/buyer wants to place a bid that is significantly lower than the preapproval amount, a new letter for a lower approval amount might be better for negotiations so as not to tip off the seller that the offer could be increased.
I've been using the term mortgage professionals because the relationship could be with a banker, a broker, or a broker/banker. The mortgage professsionals at major banks are mortgage bankers. They will approve the loan based on their bank's criteria and the bank will fund the loan. A broker will preapprove the individual based on their creditworthiness and later find an appropriate lender once a specific property is identified. A broker/banker can do both: They can tap into banks, other lenders, and could even have their own bank fund the loan. Depending on your circumstances, it might be appropriate to work with one of these individuals over the others.
Now that we've covered the preapproval letter and how to obtain one, stay tuned next month for standards used by banks in making their lending decisions.