Submitted by On Q Financial
As we head deeper into residential real estate ‘high season’, positioning yourself as a strong buyer is crucial to purchase contract negotiations. One of the many steps you can take to help represent you as a strong buyer is to obtain what is known as a pre-qualification letter (within the industry it’s referred to as a ‘prequal’).
The prequel is a one-page document produced by your mortgage lender that contains
information about you, the buyer, that a seller would find of value in assessing your ability to fulfill some of the terms and conditions of a residential purchase contract.
In fact, including a prequal as part of the purchase contract is not only recommended when a buyer is using a home loan to buy a home, but a mandatory addendum (in some states) must be submitted with the contract when the offer is presented to the seller.
Think of it this way, credit card companies don’t just randomly provide borrowers random credit. There is a process in place to validate their creditworthiness. In the home buying process, a prequal is the document that bears proof that the lender has done their homework, and will continue to do their homework throughout the escrow period, to validate and revalidate the buyer’s ability to obtain and close on their loan.
Before you begin to look for that dream house, I recommend that you contact a mortgage loan originator for your prequal. If you don’t, you run the risk of shopping for a home, finding a home you love, and losing the opportunity to purchase the home to someone else who is a “ready, willing, and able buyer” because they have their prequal in hand and are in the position to make an offer.
How do you get a prequal? When you first authorize the lender to run credit (see prior articles Part I and Part II), you learn how much home, in a dollar amount you qualify for. But there is more to it to obtain the prequal.
On the prequal form itself, there are pre-printed line items that ask specific questions about where the borrower is in the process of loan approval. Some of the questions you can expect are:
- What type of property are you purchasing?
- What type of loan (FHA, Conventional, VA, etc.)
- Is the buyer relying on seller contributing to buyer’s closing costs?
- Has the buyer provided the lender with W-2s, tax returns, paystubs?
- Is the buyer relying on the sale of an existing property?
- Has the buyer shown documentation of reserves?
- Is a tri-merge credit report completed? (see Part 1 of this series)
Also on the prequal, it reveals to the seller, that based on the above-
questions/answered provided, the buyer can qualify for “$” amount of a home loan. In addition, it shows the amount of its corresponding monthly mortgage payment in two ways:
- the maximum allowable payment that includes the principal and interest AND
- the maximum allowable payment that includes principal, interest, taxes, insurance(s) and homeowner’s association fees, if applicable
The maximum allowable mortgage payment is also based on an interest rate, also stated on the prequal.
The prequal is valid for a limited time, shown on the document. Within the time frame, the prequal is valid, subject to the buyer’s ability to maintain current employment, current credit worthiness, and other financial criteria stated on the prequal. To make the document binding, the lender will fill out their contact information and their signature.
With the prequal in hand, you are ready to search for your new home and submit an offer to purchase.
It’s a great time to step in to homeownership. To get a refresher of the initial loan process, refer to this blog series Home Ownership Plan for Millennials, Part I,II, and III.
For more information or to contact Chris Johns at On Q Financial, visit www.chrisjohns.onqolympia.com or call (360) 347-8000.
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