Going into 2006, almost anyone with a pulse could get a mortgage to purchase a home. Even 90% and 100% loans were made to people who later ended up losing their homes to foreclosure after 2007. After the financial and bank bailouts, the government cracked down on the lenders, and it became a whole lot more difficult to get a loan.
Higher down payments and higher credit scores are required, and far fewer people can qualify for a mortgage. Why, if your score is fine and you have cash for a down payment, do you need to be concerned about this? You need to step into the sellers’ shoes for the answer.
If you’re about to offer to purchase a home, the seller has no idea if you’re able to get a mortgage, or if you have the necessary down payment. If they accept an offer on their home, it is effectively off the market until all contingencies are met, including the buyer’s ability to get loan approval. Sellers are understandably cautious about accepting offers without some assurance that the buyer can get that mortgage.
Along with this caution, there is also less inclination to negotiate with a buyer if they aren’t sure that they can perform on the contract. So, the best way for a buyer to reassure a seller about their financial ability is with a mortgage pre-approval letter. If the seller sees that a mortgage company has already done a preliminary check of the buyer’s credit history and has written a letter of pre-approval, they will feel better about signing on the dotted line.
It’s called a “pre-approval” for a reason. It isn’t a solid done deal approval. There will be contingencies, such as a valid title insurance commitment, proper insurance on the home set up prior to closing, a final credit check before closing, and some others. However, the pre-approval tells the seller that the major hurdle has been cleared.
Before you go out seriously shopping for a home, get a pre-approval letter from a mortgage broker or lender. It can specify an amount up to which they are issuing the letter. It will take them just minutes to print one out for you after they’ve checked your credit out.
One other thing that many buyers overlook, and that can help a lot, is to get a letter from their bank or financial institution holding their down payment money. It’s called a “proof of funds” letter, and assures the seller that you have the money for the down payment. Having these two documents presented with an offer will put you at the top of the pile if other buyers are around. Even if not, your offer will get serious consideration, and the seller may even bend a little more on the price.