I know this subject as been beaten to death like a dead horse, but in many cases home buyers tend not to take the importance of a mortgage pre-approval seriously enough when buying a home, especially in today’s Los Angeles real estate market. A mortgage is unlike other loans like buying a car. Qualifying for a mortgage is not an easy process and starting your home search before you have that approval in hand can lead to a lot of wasted time and great disappointment.
No offer will be accepted in the L.A. real estate market without a letter from the lender, or in the case of an all-cash offer, proof of funds. More and more sellers are asking for an actual pre-approval letter rather than the more common pre-qualification letter of the past. What is the difference between a pre-qualification and a pre-approval? A pre-qualification generally means that the lender just takes an overview of the buyer’s credit worthiness and financial status, not going too deep. A pre-approval means the mortgage broker gathers all the buyer’s documentation and sends it to the underwriters who dig deep and assess the risk. They look at things like FICO score, stable income, debt-to-income ratio, and enough funds to close on the loan. Lack of a stable income is often one of the main reasons a mortgage will be declined. For instance, those who are self-employed and whose income fluctuates, or who don’t pay themselves a salary throw up a red flag to the lender. In the buyer’s mind they have more than enough money to purchase a home and make payments on it, but that is not enough for the lender. They need to see where the funds are coming from.
Imagine you have been searching for a new home, combed the internet and toured those that you are interested in, and you finally find one you really love and make an offer on it, hopefully with your own real estate representative. (More on why you should have your own representation rather than going straight to the listing agent here.) You make an offer showing a pre-qualification from your lender and your offer is accepted. The clock starts on the day the contract is signed, and in California the standard length of time the buyer has to remove their loan contingency is 17 days. With no actual pre-approval that is very little time to get the job done. The amount of paperwork the underwriter will probably ask for over and above the initial stack is mind-boggling. Sometimes the seller will allow for an extension for a few days because they understand the nature of the mortgage process, but others won’t and the contract will be cancelled.
Getting an initial pre-approval sounds daunting but it really is necessary. The buyer is going to have to get all the required documents together at some stage. There is no way around this process so why remove the main obstacle to getting the home you have fallen in love with. Depending on how long it is between your pre-approval and you finding the home you want to buy you will probably have to go through underwriting again but it will be a much easier process the second time as they will have most if not all your paperwork. Get your mortgage approved. It is worth it.