Recently, reader “Eri” asked a question about getting pre-approved for a mortgage when looking to buy real estate. I thought I’d pass this one on to an expert, Shailesh Ghimire — The Arizona Mortgage Guru. Shailesh and his wife Aimee are two of our favorite Phoenix area lenders.

The question:

I am in the beginning stages of buying my first investment property, which will also be my first property, ever; I have not applied for financing, as I’ve been advised not to get pre-approved Whether for credit reasons or simply to be contrarian, I’m unsure. I’m interested in the real importance of being pre-approved for a mortgage and if there is any difference in taking this approach. Thanks for your help! Eri

Shailesh’s answer:

Eri, this is an excellent question. Many buyers, especially first time home buyers, ask why they need to be pre-qualified. 

In my opinion it’s always a good idea to be pre-qualified with an experienced lender. I would even take it a step further say it’s also important to be pre-approved. I’ll talk about the difference in these terms later. First and foremost you want to be pre-qualified so you know the loan amount you are able to borrow for your purchase. Quite honestly, it’s a waste to look at real estate without knowing the amount you will be able to bring to the table. Think of it this way, if you can’t afford a $550,000 house then there is little reason to spend time and energy looking at such homes.

Now to define the terms I mentioned earlier. Pre-qualification is when the lender takes your basic asset, income and debt information and determines how much of a loan you may qualify for. This is usually a simple calculation and the amount you qualify for is essentially based on your debt to income ratio (DTI). The lender may or may not pull your credit at this stage. Even if credit is pulled, there is no commitment form the lender and the “answer” is really not even tentative. That is why a pre-qualification is a good first step but not sufficient for someone serious about purchasing real estate.

To be taken seriously you need to be pre-approved. You can receive a pre-approval when the loan officer takes a full mortgage application, pulls credit and determines exact loan amounts and requirements.  Not only are all the calculations involved in a pre-qualification done at this stage, but the loan officer also reviews the file and addresses any potential issues. The loan officer then can then obtain a tentative approval for the loan subject to the borrower fulfilling certain conditions. Conditions could involve verification of employment, income, assets etc. A pre-approval is really the highest form of approval you can receive short of a full approval.

Finally, a major benefit to being pre-approved is that the seller will take you seriously. I know when I was selling my house a few years ago I could not possibly take a buyer seriously who had not been pre-approved. I can’t imagine that any other seller would behave any differently.

In summary, it is always a good idea to get pre-qualified, and it is even better to be pre-approved. It helps you determine the price range you can afford and establishes you as a credible buyer serious about seeing a transaction through. Otherwise the whole process becomes an energy sucking exercise with lots and lots of headache for all parties.

Jay’s Note: I have to agree with Shailesh on this one. In the Phoenix real estate market (and many others across the country), and in the current lending environment, it is critical to demonstrate to sellers that you are not only willing to purchase their property, but that you are able to. Also, the standard Arizona Residential Resale Purchase Contract requires a “LSR” (Loan Status Report) be submitted with each offer. An LSR is in effect a pre-qualification. Pre-approval will make you, at least in the eyes of the seller, a stronger buyer.

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[tags]loan pre-qualification, pre-approval[/tags]