Over a Decade of Experience
Selling Real Estate Throughout Los Angeles
Pre-Qual’d versus Pre-Approved
Buyers and Sellers are often confused by the difference between mortgage loan pre-qualification and a home loan pre-approval. Even some loan officers and real estate agents will use the terms incorrectly, so here’s what you really need to know about each one.
A mortgage loan pre-qualification is simply an estimate of how much house you can afford and how much money a lender would be willing to loan you. The best time to get a pre-qualification is right at the beginning of your home buying process, before you even start looking at houses. This involves providing information on your income, assets, debts, and a potential down payment amount. Your lender will then provide you with a general figure in writing of how much he thinks you could afford to pay for a monthly mortgage with all associated costs. There is no commitment on the buyer’s end to work with that lender in the future. This estimate is just helpful in helping you figure out if buying a home is a viable option, and if so, what your price range would probably be.
Getting pre-approved means that you have a tentative commitment from a specific lender for mortgage funding. In this case, you provide a home loan lender with actual documentation of your income, assets, and debts. This process typically requires an application fee as well, since the bank will run a credit check and work to verify all your employment and financial information. Once you are approved, your lender will give you a letter of commitment, stating how much money the bank is willing to loan you for a home purchase. With a pre-approval in hand your offer will be taken more seriously.
Shopping Around or Second Opinions
It is important to understand, however, that even a pre-approval is not a guarantee that you will be approved for a mortgage loan. The funding will only be given when the property appraisal, title search, and other verification occurs related to a specific property. Neither are you stuck with the lender once you’ve been pre-approved; you can still obtain a mortgage from a different lender. If you do stick with the same lender that pre-approved you though, the loan process will be much shorter once you find the right house.
9 Tips For Buyers In a Seller’s Market
Get your finances in order first, several months before you intend to start looking, you should get copies of your credit reports and speak to a lender (or two) to make sure you’re in a financial position to buy. It is a good idea to shop for mortgage financing before you start looking at houses. Most sellers insist on a letter from your lender before they will even consider your offer! Some lenders are doing the underwriting before the house is under contract, which shortens the closing time and can be more attractive to the seller.
If you find the house you want you will have to move quickly. This may mean rushing out to see new homes within hours of them being listed (Brenda understands the current market and will accommodate emergency showings) and writing up an offer immediately if you like the house.
Don’t rule a home out based on listing photos alone. A house that doesn’t look appealing in photos could still be a great house and perhaps there will be less competition if other buyers aren’t willing to go see it based on photos. Homes being sold by an estate or homes with tenants inside often yield particularly poor photos. Plus, photos fail to convey the feeling of a home or the floor plan.
Be realistic about the inspection and repairs during your buyer contingencies. In a Sellers market, especially if there was more than one offer, the less likely a seller will be to make non-safety related repairs. The purpose of the inspection isn’t to get the seller to repair every small problem but to find out for sure that the house is what you thought it was. Keep in mind you aren’t buying a brand new home – every house is going to have some flaws. In California, Sellers don’t legally even have to respond to your repair requests, they are only obligated to allow you to investigate and inspect the home and make a decision about whether you want to go through with the transaction.
Start with your best offer. A competitive market is not the right environment to negotiate a bargain. You may get only one chance to make an offer, and your offer may be one of several the seller will choose from. Remember that the offer includes not only the price, but also your financing package and other terms such as the closing date and contingencies.
Write a personal letter to the sellers. Some sellers are interested only in how much money their home sale will yield, but others love their home want it to go to a new family that will love it just as much. If you really like a house, include a personal letter and a family photo with your offer.
Make a big earnest money deposit. The expected size of the earnest money deposit, and the rules about when you get it back vary. But sellers often see a larger deposit as a sign that you’re serious about the deal and have liquidity to back it up. The earnest money deposit is due in escrow within three days of a making a deal, but it isn’t given to the seller until close of escrow and it can be returned to the buyer if the deal doesn’t go through because of some situations during the contingency period.
Make a backup offer. Many prospective buyers don’t want to make an offer on a house that has a pending contract. But deals fall apart over inspections, financing and other terms. If you found the perfect house, you can make a backup offer that will put you in first place if the initial buyer walks away.
Consider waiving or shortening contingencies. Most offers are made contingent on the buyer getting a mortgage, the appraisal being equal to the purchase price and the buyer approving the inspection, disclosures and certain information. Waiving any one of those contingencies can be risky for your earnest money deposit, but may be the right move in some circumstances. Shortening the time periods, such as promising to do the inspection in less than 17 days or getting financing solidified sooner than 21 days can make your offer stronger in the Seller’s eyes.
What is an Appraisal?
Appraisals are an important part of the homebuying process. A real estate appraisal establishes a property’s market value – the likely sales price it would bring if offered in an open and competitive real estate market. Lenders require appraisals when buyers use their new homes as security for their mortgages. An appraisal provides the lender with an assurance that the property will sell for at least the amount of money it is lending.
Don’t confuse a comparative market analysis, or CMA, with an appraisal. A CMA is a sales report based on data entered into the multiple listing service, or MLS. Real estate agents use CMAs to help their clients determine realistic asking and offering prices. Appraisals are detailed reports compiled by licensed appraisers. An appraisal is the only valuation report a lender considers when deciding whether to lend the money.
An appraisal is also not the same thing as a home inspection. Home inspectors test appliances and outlets, check the plumbing and confirm that a home’s heating and cooling system is working. Such information is helpful for the buyer to know before moving in. An appraiser, however, is only concerned with valuing a home.
Appraisers are licensed by states after completing licensing coursework and internship hours.
The appraiser must be an objective third party, someone who has no financial or other connection to any person involved in the transaction.
If a property falls out of escrow the new buyer usually cannot use the old appraisal. Additionally, the buyer cannot use a seller’s previous appraisal (ie. One for a re-finance or to set a value prior to listing).
In some cases, the buyer pays for the appraisal at the time of loan application. Other times, the appraisal fee is added to the settlement statement and paid at the closing table. In California an appraisal costs between $350-$750 usually.
Appraisals are very detailed reports based on an appraiser’s on-site evaluation of a property as well as an evaluation of sales data.
Here are a few things they include (certain types of loans require more specific types of appraisals – FHA & VA are more detailed than Conventional loans):
- Details about the subject property, along with side-by-side comparisons of similar properties.
- An evaluation of the overall real estate market in the area.
- Statements about issues the appraiser feels are harmful to the property’s value, such as poor access to the property.
- Notations about seriously flawed characteristics, such as a crumbling foundation.
- An estimate of the average sales time for the property.
- The type of area in which the home is located, for example, a development or stand-alone acreage.
Buying a home? Your lender’s appraiser will use the sales comparison approach.
The appraiser estimates a subject property’s market value by comparing it to similar properties that have sold in the area. The properties used are called “comparables”. No two properties are exactly alike, so the appraiser must compare similar properties to the subject property, making adjustments so that their features are in-line with the subject property. The result is a figure that shows the price at which each comparable property would have sold for if it had the same components as the subject property. Comparable properties must be within a certain distance of the subject property and must have closed escrow within a certain time period. In California, the distance is usually less than three miles and the property has to have closed within the last 90 days.
So, what does the appraisal mean to you?
A homebuyer’s initial mortgage approval is accomplished early on, but final approval usually hinges on a satisfactory appraisal. The lender wants to be sure its investment is covered in case the buyer defaults on the loan. If the property appraises lower than the sales price, the loan might be declined
Lenders study appraisals carefully before determining whether a property qualifies as security for a home loan.
Don’t panic if the appraisal comes in low because there are steps you can take to make the deal work.
- The Purchase price can be lowered
- The Buyer can add additional funds to cover the appraisal deficiency
- Or the deal can be cancelled