Loan Prequalification A Potential Trap

Loan Prequalification – a​ Potential Trap
As with much of​ the​ real estate industry,​ the​ mortgage industry uses terms that sound great,​ but really are not what they sound like .​
The loan prequalification is​ such a​ phrase .​
Loan Prequalification – a​ Potential Trap
If you​ have shopped for a​ home,​ you​ know all the​ interesting terms people use to​ describe their property .​
a​ cozy home can be translated to​ mean the​ home is​ essentially a​ closet with a​ bathroom .​
a​ rustic home often means the​ place is​ so decrepit,​ scientist study it​ to​ see if​ it​ is​ breaking the​ laws of​ physics by remaining upright .​
I​ am sure you​ have more than a​ few examples of​ your own .​
In the​ mortgage world,​ loan prequalification is​ an​ activity and phrase that is​ interesting .​
The basic idea is​ a​ buyer goes to​ a​ lender prior to​ shopping for a​ home and attempts to​ determine what they can borrow .​
The lender does a​ cursory interview and maybe looks a​ paycheck stub .​
The lender representative then declares that buyer is​ prequalified for a​ certain amount .​
With letter in​ hand,​ the​ buyer heads out to​ find that unique property that is​ just right .​
While this all may sound great,​ there is​ a​ serious problem .​
a​ prequalification determination by a​ lender is​ not worth the​ paper it​ is​ written on​ .​
Anyone can get prequalifed .​
The lender has really made no determination .​
All they have done is​ give you​ a​ piece of​ paper that they hope will get you​ to​ come back and actually apply for a​ loan with them .​
The bank hasn’t actually run though any of​ the​ criteria it​ uses to​ write a​ loan,​ so there is​ no value to​ it .​
The dollar figure quoted in​ the​ letter might as​ well be for a​ bazillion dollars for all it​ is​ worth .​
The prequalification letter is​ not binding on​ the​ bank .​
As you​ can imagine,​ this scenario represents a​ trap from some buyers .​
When given the​ prequalification letter,​ they assume they will get a​ loan for the​ amount in​ question .​
They then make a​ purchase based on​ the​ figure .​
Imagine their surprise when the​ bank subsequently rejects their application or​ approves them for a​ lower amount .​
The trap has closed on​ them and they will lose their earnest money deposit on​ the​ real estate transaction .​
This happens every day .​
Loan prequalification letters are useless,​ but pre-approval letters are another matter .​
a​ loan pre-approval works the​ same way as​ a​ prequalification letter .​
The difference is​ that you​ actually go through the​ entire loan application process .​
The bank then makes a​ final determination and pre-approves you​ for a​ loan amount .​
The pre-approval is​ binding on​ the​ bank,​ but usually for a​ short period of​ time such as​ 30 days or​ so .​
If you​ obtain a​ pre-approval letter,​ sellers will be very receptive to​ your offers .​
In mortgage,​ you​ should keep in​ mind that it​ is​ pre-approval,​ not qualification,​ that is​ the​ magic ticket.

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