Understanding a Buyer’s Ability to Close – A Guide to Loan Readiness

For sellers, qualifying a buyer’s ability to get a loan – AKA the other party’s ability to perform on any offer they make – is tiered. Knowing the difference between a buyer who is pre-qualified, pre-approved, or in possession of underwritten approval is paramount to weighing the likelihood that any offer you accept is likely to close on time and as promised. For buyers, understanding what level of readiness you’re at is essential to being able to make an offer with confidence and can be confusing if you’ve never gone through the process. So often I’ve heard, “I’m approved for this much,” only to discover you most definitely are not and you have no idea what it really takes to be ready! So let’s dive into the nitty gritty of each layer of qualification and what they really mean.

The Pre-Qualified Buyer

For buyers, a pre-qualification is equivalent to saying, I intend to get a loan but I’m not really going to do anything required to make sure that is going to happen. In general, it’s a letter from a company the buyer has not given any real documentation to based on what they say they make or have income and assets in, usually from an online application. 

In other words, said buyer can state I have 10 trillion dollars of income and assets so I can afford whatever, now let’s get into contract, honest seller, and I’ll figure out the details later.  

There are multiple issues with this form of qualification, even if the buyer does not intentionally lie, which is usually the case in my experience. One, a pre-qualification requires no credit check and is not reviewed by a loan officer. It’s simply a ballpark estimate of how much a buyer may be able to borrow. Two, different lenders have different guidelines (known as underwriting guidelines) which means a borrower that has, say, $15 million dollars in stock assets but only makes $150,000 a year in income is much to their surprise unlikely to be lent more money than their stable income will generate (unless you’re with a lender that will lend on your stock portfolio, which is a separate blog post all together).  Three, because it’s unverified, it doesn’t mean much, as borrowers don’t know how that institution will actually qualify their income and assets. They are likely to get more than one surprise during the loan process about what documentation they need or how the bank sees their assets. 

 I have to say as an experienced agent, a pre-qualification is not worth the paper it’s written on for either party. I’m not a fan.

The Pre-Approved Buyer

This is a lender-generated qualification that requires a hard credit check, the completion of a mortgage application, and the submission of a variety of documents, all of which are reviewed and validated. It’s a giant step above the pre-qualification because it’s a definite indication of how much a buyer can borrow, down to the purchase price, loan amount, monthly payment, and interest rate. Those specifics mean enormous peace of mind to both the buyer and the agent in the event the offer is accepted. It can also mean a quicker closing time of 21 to 25 days, not to mention having the headache of what is the equivalent to a tax audit worth of documents submitted and behind you when you’re trying to read inspection reports, decide what if anything to offer and focus on a move. It’s not as good as a fully underwritten qualification (described below), and it’s also worth noting if the pre-approval is coming from an unknown lender entity that no one has heard of versus a company like Bank of America, it’s going to be suspect, and understandably so by the experienced listing agent on property.  

The Fully Underwritten Buyer

A buyer with underwriting approval has not only jumped through all the hoops as above but everything has been sent to the bank or lending entity’s internal pencil pusher – AKA the underwriters in charge of making sure that all i’s are dotted and every annoying t is crossed. In other words, they are in charge of stress testing the documents given and assuring the bank’s assets are not going to an irresponsible source to reduce the likelihood of a default on the mortgage given. 

Full underwriting means the only thing in between the loan and close is approval of the subject property. That requires in most cases an appraisal, title search and making sure if it is a condominium that the financials check out. The bank’s underwriting department has pre-vetted all the buyers’ documents, including income, assets, and credit, and run a hard credit check to demonstrate that the buyer is completely approved. Once an offer is accepted, minimal documents like the appraisal and title will be necessary, but the bulk of the work is done. Like the pre-approved buyer, this level of qualification means peace of mind to the buyer and agent if the offer is accepted and can function as a great close-second to a cash buyer. But beware that kind of qualification has a time limit, so if you were fully underwritten in June of this year, chances are you are going to need to update that. Buyers have the option to write a non-contingent offer with much more confidence if that will help them win a property for less money and the lending can move more quickly – closing can happen within 10 days depending on if an appraisal is required or not.

The Takeaway

Understanding the nuances of how most loans are qualified is of utmost importance regardless of whether you’re a buyer or seller. If you’re a seller, knowing how likely any offer made is going to get to the finish line is a key component to choosing a buyer in a multiple offer situation – yes, they still happen – or deciding to plug your nose and take an offer below what you hoped. Let’s be honest, every seller, myself included when I’m selling my own properties, always wants more than what current markets will bear. As a buyer, say you are competing against other buyers even in a below list price fashion or against a cash buyer who has made a lowball offer. The stronger your approval is, the more aggressive your offer can be in terms of timing. And any concession you make that doesn’t cost you out of pocket but may win a property for a lower price is a good tool to have in your pocket. 

Need another good reason to do your homework upfront? Soaring mortgage interest rates dropped by half of a percentage point over the last two weeks. They fell from above 7% earlier this month to 6.53% for 30-year fixed-rate loans in the week ending Nov. 23, according to Freddie Mac.  How can that be when the Fed’s keep raising the short term rates?  Because, I feel like a broken record, 30 year fixed are tied to bonds – usually the 10-year Treasury Bond to be precise and that fluctuates on a variety of factors but inflation is a big mover of them and the most recent inflation numbers suggested that inflation may have peaked.   

The sharp drop in mortgage rates this week opened a window of opportunity for buyers who are looking to lock in their rate. At the lower rate, Buyer’s not only save money on their monthly payment, but a significant amount in interest over the life of the loan.   It pays to be prepared with your mortgage and be out shopping so you can make good on what could be a short window of interest rate drops.

Need a good recommendation for a great lender (and who is great will vary depending on your personal financials) or have questions about what listing your home in the current environment entails? I have a great track record of success in a variety of different real estate markets. Feel free to reach out!

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