Pre-Approval: Necessary or Not?

Our years of experience have taught us that no one should go into buying a house without knowing that they are pre-approved for a mortgage. Especially here in the Hamptons, where houses can get snapped up very quickly. Unless you are paying all cash, buying a house takes some forethought. It’s a big financial commitment and being fully prepared helps to avoid bumps in the road that could cost you your dream home.

One good house at $800,000 could have 20 people bidding on it, so a pre-approval letter is really important. Average price house, under $1,500,000 – we are asked for those letters all the time, especially in a hot market. You’ll feel a lot more confident with a pre-approval letter so you know you are house-hunting within your budget and sellers know that they are not wasting their time with someone who can’t get a mortgage.

The best scenario is when people come to us as soon as they think of the possibility of buying a house and we do all the due diligence as if they’ve found a house already. They bring us their documents and we gather all the necessary paperwork, run credit, bank statements, verify income with their job, etc. Do they have too much balance on one credit card?. Or have they just paid off a big credit card bill? Those are real red flags to lenders. Getting your finances organized can take awhile, so doing it early means you have time to correct any issues.

The actual approval itself can take just a few hours for someone with straightforward finances or maybe a couple of days if we are working with more complex tax returns or self-employed individuals. The banks we work with have automated approval systems so either way, results are much quicker than they used to be!

An important thing to remember is – all monies used to establish income must be documentable to the bank. The borrower should be able to show that their money has been in their account for at least two months or prove how a more recent increase was acquired. For example, if you get a big bonus from your job or have just sold another property – those additions to your bank account can be verified. But a sudden infusion of cash with no paperwork? People are usually very careful and honest about this and last-minute problems are rare. We did, however, have one client who told us he was getting a $20,000 gift but actually just deposited that amount of cash into his account less than two months before the closing. He had no documentation for it and was denied a mortgage by the bank. All that time and hard work and then no closing!

Financial verification also includes gifts to help with the down payment. Many parents and grandparents are prepared to help their kids pay that first big chunk but the gift must be accompanied by a gift statement and show that it is coming out of their bank account and into yours.

As part of the pre-approval process, we also let you know how much cash you’ll need to finalize your mortgage. There is a laundry list of closing costs that need to be paid out of pocket and not from the loan. Factoring those into the total cost can make a difference in timing or total borrowing amount.

So before you are ready to buy, think about it.  It’s always good to talk to a mortgage professional before going shopping.