Before you submit a real estate offer, you should be already preapproved for a mortgage. Getting preapproved for a mortgage is now the bare minimum in a strong real estate market. Sellers won't want to waste their time with potential buyers who are not preapproved.
During a soft real estate market, being preapproved for a mortgage will let you stand out far above your competition. Being reapproved is a signal to the seller you are a serious buyer with your finances in order.
Let me share with you the process for getting preapproved; what documents you will need to get preapproved; and why being preapproved for a mortgage is so important.
But first, let me explain the difference between prequalified versus preapproved. These terms are sometimes used interchangeably, which is incorrect.
The Difference Between Preapproved And Prequalified
Prequalification is good, but it is not nearly as good as getting preapproved. When you prequalify for a home loan, you’re getting an estimate of what you might be able to borrow, based on information you provide about your finances, as well as a credit check.
Consider prequalification more like dating. You and the bank are still trying to get to know each other, but you're not 100% serious yet. The lender has not fully committed to supporting you if you buy a home. You can use the prequalification process to figure out whether you want an adjustable rate mortgage or a fixed-rated mortgage.
Preapproval is as close as you can get to confirming your creditworthiness without having a purchase contract in place. You will complete a mortgage application and the lender will verify the information you provide. They’ll also perform a credit check.
If you’re preapproved, you’ll receive a preapproval letter, which is an offer to lend you a specific amount, usually good for 90 days. Once the 90 days is over, you have to go through the preapproval process again if you still haven't found a home.
Consider preapproval more like getting engaged. You are 95% committed to each other and plan on getting married. But unlike getting engaged, you don't have to buy a costly engagement ring. Getting prequalified or preapproved is usually free.
In both cases, the mortgage rate you get will also be an estimate until you get into contract and lock.
How To Get Preapproved For A Mortgage
The very first thing you need to do is find a reputable lender. You can do so by either finding one online or you can reach out to an existing banking relationship.
Because I recently refinanced my primary home mortgage, I reached out to the same lender to see if they were open to doing purchase loans. With refinancing demand sky-high due to record-low interest rates, not all lenders have the capacity to take on purchase loans.
However, as during normal times, most lenders usually prioritize purchase loans over refinances. Therefore, my lender said he was willing to work with me.
What The Lender Will Want To Know
Timing: The lender will want to know approximately when you plan to buy. Ideally, you want to get preapproved one day before you find that ideal property because preapproval won't last forever.
After two or three months, you will have to resubmit financial documents. You also don't want to get preapproved more than two weeks after a property first lists, because your competitors will have had more time to put in a better offer.
Price: The lender will want to know the approximate price range of the property. If you have a specific property in mind, you can send him or her the listing. It's important to get approval for the maximum property price.
It's much easier to change the terms and get preapproved for less money than more money. If you decide you need more money, you may have to go through a time-consuming underwriting process again.
Getting permission to do a credit check: To get preapproved or prequalified, the lender needs to check your credit. The credit check usually shouldn't cost you anything and usually shouldn't hurt your credit score, unless you've had multiple credit checks within the last couple of months.
Plans for existing residence: The lender will want to know what you plan to do with your existing residence. Sell or rent it out are the two usual options. But other options could include leaving the property empty, turning the property into a home office, or letting a friend or relative live on the property rent-free.
Duration at existing residence: If you refinanced your primary residence within the past 12 months and plan to get a purchase mortgage with the same lender, you may hit an underwriting road bump.
The reason why is because most primary mortgage refinances require the homeowner to sign-off that he or she plans to live in the home for the next 12 months. This agreement helps protect the bank from property owners who try and refinance rental properties or properties earmarked for rental as a primary residence. Mortgage rates for primary residences are often 0.25% – 0.75% lower than mortgages for rental properties.
If you go with a lender who did not refinance your existing primary mortgage within the past 12 months, you may not have to go through any delays due to further underwriting scrutiny.
Documents Needed To Get Preapproved For A Mortgage
Here are the documents your lender will likely ask from you to get preapproved:
- Two most recent paystubs (months)
- Two most recent W2s (years)
- Two most recent 1099s if applicable (years)
- Two most recent tax returns (years)
- Two most recent investment statements (months)
- Two most recent checking and savings account statements (months)
- Latest business profile and loss statement and balance sheet if applicable
- Mortgage and HOA statements for all investment and vacation properties
- An explanation for all large (over $1,000) banking transfers and deposits during the last two months
- Printouts of large (over $1,000) check deposits during the last two months
In addition to requiring plenty of financial documentation, your lender may also want you to write a short note stating why you want to buy. If you purchased another property or refinanced your primary mortgage within the past 12 months, the lender will more than likely ask you to explain your actions.
A short explanatory note can either be done in an e-mail or in a word document. Here's an example:
Dear Lender,
I'd like to get preapproved for a mortgage because I'm looking to take advantage of potential real estate deals during a pandemic. Never in my wildest dreams did I expect a virus to derail the entire economy and lock us up for months. We are a family of four looking for more living space and a backyard.
We have enough cash to put down between 20% – 60%. Ideally, we'd like to take advantage of low mortgage rates and put down somewhere between 20% – 30%, depending on the results of your underwriting process. As you can see from our credit report, we are excellent borrowers who take our obligations seriously.
Regards,
A Financial Samurai
Why Getting Preapproved Is Critical
The more you can get your finances in order before a large purchase, the better your experience will be. Don't wing one of the largest purchases in your lifetime!
To get the best price and have the best chance of winning, it's always best if you can make a true all-cash offer.
So many things can and will go wrong during a real estate transaction. Therefore, if you have an all-cash offer, you remove one of the most frequent causes of a broken contract: a financing contingency.
A financing contingency gives a buyer a risk-free exit if he doesn't get approved for a mortgage or doesn't like the terms of his mortgage. In this situation, the seller's successful sale is dependent upon both the buyer's price decision as well as the lender's.
If you do not have the funds to pay all cash for a home, then the next best thing is to get preapproved for a mortgage before submitting an offer. Given you already have preapproval, as a buyer, you can confidently submit a no-financing contingency offer.
From the seller's perspective, having a no-financing contingency offer should drastically reduce his concern that the deal will fall through. While there may still be some concern given two buying parties are involved instead of just one, however, there could also be more confidence in the deal going through because a reputable lender usually has way more money than any individual.
Some sellers view a no-financing contingency as good as a true all-cash offer. Of course, in addition to having no-financing contingency, a buyer can also sweeten his offer by waiving an inspection and having a fast close.
With a true all-cash offer, the fastest closing time is usually between 10 – 14 days. With a no-financing contingency offer, the fastest time to close is usually about 21 days. Either way, closing in 10 – 21 still compares favorably to 46 days, the average time it takes to close on a new home purchase according to Fannie Mae.
One Timing Caveat For A Preapproved Offer
In an ideal scenario, you will be fully preapproved before making an offer on a property. However, sometimes during your preapproval qualification process, you may find a property that you absolutely love. If you find yourself in this scenario, you will likely have to make an offer with a financing contingency.
You can always gamble and still make a no-financing contingency offer if you are supremely confident your lender will come through or if you have enough funds to make up any shortfall. Just be aware that backing out of a deal due to financial reasons when you did not have a financing contingency puts you at risk of losing any earnest money you put down – usually 3% of the purchase price. Further, you won't have the preapproval from the lender to give the seller extra confidence.
When it comes to buying real estate, financial preparation is key. Get preapproved for a mortgage so you can better compete. And if you still don't understand why mortgage preapproval is so important, then put yourself in the seller's shoes.
Having a great offer with a lovely real estate love letter is nice. But without preapproved financing, it's much harder to take a risk and accept that offer when there is another buyer who is 100% ready to go.
Invest In Real Estate More Strategically
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile.
The combination of rising rents and rising real estate prices builds tremendous wealth over the long term. Meanwhile, there are more ways to invest in areas of the country where valuations are lower and net rental yields are higher thanks to crowdfunding.
Take a look at my two favorite real estate crowdfunding platforms that are free to sign up and explore:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. The real estate platform has over 300,000 investors and manages over $3 billion.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
I've personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
Hello, thank you for this valuable post. This is for anyone, not just Sam. I’m currently trying to decide whether to use my ETF invested stock funds for a 20% down payment. I know that Sam doesn’t like paying PMI, but I’m trying to run the numbers and it’s telling me I should minimize the down payment. Below are the numbers. I would appreciate anyone’s input on whether my math and reasoning is sound:
Based on Credible’s numbers —
700K home, current interest I qualify for is about 2.625% for a 30 year conventional fixed, close to 0 points.
With 50K down payment, my monthly is $4152 (this includes PMI)
With 140K (20%) down pay, monthly is $3576
Difference is $576 per month, annualized to $6912.
If I invest this difference annually for 15 years, assuming 8% stock ETF return, I end up with 202,689 (170,536 if assuming a more conservative 6% return)
If I instead go the lower down payment, I can invest 90K (140K – 50K) for 15 years at 8%, and end up with 285,495 (215,690 at 6%)
Given these numbers, it would appear that I should go with the lower down payment and be ok with PMI.
Addendum: I would have to set the index fund return rate at 2% to make the 15 year total to be even between the two scenarios (paying 50K vs 140K as down payment). That would seem to be a very easy bar to clear for the index fund.
I’m looking for a mortgage company that does bank statement loans. Can you or someone recommend a lender?
Awesome write up, Sam! Thank you so much for taking the time to do it. My husband and I are pursuing to be first time home buyers and we truly believe the time to buy has come!
Being a medical professional in Los Angeles, do you know if physical mortgage loans are legit? (Low or zero down payment, no PMI)
Has any one used quicken loans or Better?
I have 1.7M property with 700k loan and like to refinance to take out 500k for family needs.
Any idea which vendor can provide best terms.
I can also do interest only as I plan to live less than 10 years in property.
Requirements:
1.7M , 700k loan , 500k our , 1.2M loan . Interest only for 10 years.
Thanks for help.
Hi
Good experience with better.com during a recent refinance. Good rates and extremely quick and efficient interaction. I was refinancing a much lower value property however.
I considered quicken but they haven’t been competitive with other online companies or local banks.
Good luck
We refinanced with HSBC … 10/1 interest only arm. Numbers are no where close to yours, but we are expats (US citizens living outsidde of US), and HSBC was the only one who would entertain our situation (using foreign earned income).
My wife and I just had an offer accepted on a house and are very excited. We looked at Quicken Loans as well as a few local and national banks. I have to say, Quicken Loans sales agents were extremely unprofessional, intentionally hid costs, and failed to provide any transparency compared to other lenders. They won’t even give you a loan worksheet until your offer is accepted!
I really would not recommend them. You’re better off with a local bank that knows your market.
Thanks everyone for input. I am not too impressed with these online loan agencies. I will try BofA, current mortgage vendor and credit union.
I also have private banking with chase and see if they can help.
Hope everyone is safe and things improve soon.
Sam –
Considering the list of items requested for a loan, generally speaking how long have you retained and saved documents such as investment statements? Most information is available online and most investment houses track cost basis. Appears saving statements is not as vital (perhaps at all today) and when requested one can access the past few years online.
All the items are always online. So they are easy to retrieve. There are simply a lot of documents that must be retrieved.
Truth! We just closed on our new home here in Lexington, KY on Monday from our offer back on March 1st. If my wife and I didn’t get pre-approved beforehand, we’d probably still be at our old home not moving anywhere especially with the pandemic situation elevating in mid March. The market was still pretty hot back then with homes being sold in 1-2 days, if priced correctly.
It was all truly about timing as we listed our old place on March 12th and had over 20+ showings in that weekend with 5 offers. The week after, the virus news really broke here and all social activities were pretty much put on halt.
All in all, we made a cool $60K+ on a home that we lived in and enjoyed with our young kids for 5 years, and got a solid deal on a nice 2,800 sq ft/2 story home on a corner lot in a desirable neighborhood. Not too shabby for a smaller city like Lexington. Of course, it doesn’t compare to when I sold my condo in Redwood Shores, CA back in 2014 before moving to KY but I digress and the SF bay area is a different animal!
Cool. Yeah, tech has held up extraordinarily well during the pandemic, so it seems real estate is holding up for now.
But I am absolutely sure there are some Doomers out there who want to offload and are willing to offload at huge discounts. Just got a find them.
Hi Sam,
For any of your reader/buyers that are going w/a VA loan if they have a VA rating of 100% the 2-3% total cost of the funding fee is waived. VA buyers need to utilize this. Also, I believe any veteran awarded Purple Heart qualifies for this as well. VA buyers are allowed to have two loans now as I do. I’m sure you know that VA buyers do not have to pay PMI on the loan. These two items can be huge cost savers in high cost of living areas such as on either coast.
Tim
Good to know.
How about a FREE home for all those awarded Purple Hearts?
I’m totally down with that!
Sam
So am I, it would be very deserving. That would be awesome for them!
Hello Sam,
Thanks for this writeup. My wife and I will be first time home-buyers. I’ve put a lot of money in rent over the years because I’m on a work visa. We wanted to buy this year (2020). Would you recommend still waiting until the economy improves?
If you buy and lose your work visa, do you know the rules and whether there are any issues of staying in America without one? I don’t know the answer. Best for you to find out.
As for buying property, at the moment, I think there’s only a one or two month window left to try to snag some good deals from super bears. By the time there’s a recovery, the deals will be gone and prices might be way up.
In general, I always think it’s a good idea to go hunting and try to bargain aggressively.
Thanks Sam- If the visa is gone , I have 60 days to pack up and leave the country.(Never mind that I also have a Green Card application pending).
I’ll have to either sell quickly or find a way to rent out the property.
It’s always a risk (heightened more so now) to invest in a property without a green card, but was getting tired of the money being put away for rent.
If i did go and buy , would you still recommend putting 20 % down (60 K) v/s 5 % and a PMI? I lean towards the higher down payment because in the long run it saves money and makes things easier.
Just be aware for any non citizens …A lot of buyers from Foreign countries were buying here in the USA and then selling and not paying the capital Gaines tax. So now when a non-citizen home owner sells 20% will be held back on any sales by the escrow until after settling the taxes for that year. Good luck and hope your green card is approved.
Tim
Thanks! Considering it may take 4-5 years for that, I’ll have to find better ways to handle my cash.
I would wait to get the green card. Can you imagine the stress of having to sell the property after you lose your job? The combination is a disaster and it could make you sell at a big loss.
I like 20% or higher down payment because paying for the PMI insurance is a waste of money.
Sounds like a plan. At this point it may take 4-5 years to get the GC though. Its tricky but good to get an outside perspective
Why do you think we won’t see house prices to crash? Or at least decline some 20-30%? This is the biggest depression since 1929 and even in every standard recession the last 100 years (about every 10 years) house prices have declined at least 15%. They dropped ~50% 10 years ago, ~30% 20 years ago, ~30% 30 years ago. Why not now when even in the Bay Area hundreds of thousands of people are losing their jobs and all the uber, airbnb etc employees’ RSUs are getting worthless. (not everybody works at Amazon..)
Just curious what’s your reasoning?
Sure, check out this post: https://www.financialsamurai.com/how-does-real-estate-get-impacted-by-a-decline-in-stock-prices/
Prices didn’t fall 50% 10 years ago nationwide.
Check out what the stock market is doing.
Also, this downturn wasn’t caused by over-leverage in the housing market like in 2008-2009.
Agree.
As much as I would personally love a housing crash so I can buy, the Bay Area housing market trends and data have not shown that over the past decades.
Recessions are generally short lived and cause a 10% deflation/correction, and then the next rise comes and it erases the correction and goes up even higher than last time. It’s a sad marketplace in the Bay Area for many, despite earning high incomes.
The best thing to do is buy when you can and hold until you’re done using the house and gained enough equity.
Hey Sam,
I have a few questions for you about second guessing myself.
Context:
My family (my wife and I are engineers and a big tech company and have two-year old twins) closed on our dream family home on Feb 14, 2020 in a HCOL area. While we were nervous of a potential future recession, we pulled the trigger because a) we don’t plan on ever selling and we want to raise our kids in this neighborhood, b) prices had softened since 2018, c) we had been diligently saving/investing through the bull market and felt safe enough to take the risk, and d) I am bullish on this neighborhood in the long-term.
We think we got a great deal on the home, but one month later the lockdowns started happening and we wonder if we missed a giant renegotiation opportunity. I’ve read your posts on how the housing market reacts to stock market dips and how the housing market is doing well — but I also have read skeptics arguing that the housing market has just frozen and will thaw in bad shape. They might have a point.
Precise questions:
Do you feel this uncertainty about your home purchase in 2019 at all since it was just months before the pandemic? If not, why not? If so, how do you feel better about it?
Best,
Chris
Based on all the sales I’ve seen during the pandemic and in April so far in my neighborhood, places have held up. What are your comps selling for?
https://www.financialsamurai.com/real-estate-outperformance-examples-during-a-coronavirus-pandemic/
Buying the property with cash has made me feel sanguine about the situation. Selling $1 million of stock in 2019 to buy the property has helped too.
I plan to hold onto this property for decades as well. I truly believe panoramic ocean view properties will do very very well overtime here in San Francisco.
The property I bought is also $1 million less than the property I sold in 2017, despite my net worth being higher. So on a relative basis, i feel more frugal.
At the end of the day, if the property you’ve bought is not a big part of your net worth (<25%), you won’t really worry too much.
And if it is greater than 25% of your net worth, you will probably slowly decrease the percentage as you’re getting wealthier overtime.
If you have extra capital, I would look for more opportunities now. But they are hard to find given inventory is down.
May I ask why you ask? How are you feeling? Perhaps buying in February is so close that you are feeling unsettled?
Thanks. Checked the comps sold in late April and they surprisingly sold at asking.
Hi,
This is my first time posting, but it’s unrelated to this article. I just started investing in stocks so I am still new to it; I was wondering if I should hold my stocks or sell it due to the unstable state of the market lately. Is it a good idea to convert everything to cash and just wait until everything becomes more stable? Also, I was wondering if it’s a good idea to invest in the cruising industry, oil & gas and the banking industry ( for short term) or maybe just stick to more stable stocks such as DIS or KO?
Thanks.
Best wealth tip I can give you is to be more thoughtful and less selfish.
You asking unrelated questions in a post and not addressing the topic is a sign of low emotional intelligence. You are purely focused on yourself.
To gain wealth, you must focus on giving first. Otherwise, nobody will want to help you.
It’s funny how you wrote all this when you didn’t even read my 1st sentence. You should write me an 10 page essay on how selfish I am, since you like criticize people random people online.
Hi Mark,
Dollar cost average into a S&P index fund. You will buy at all time highs and lows. Never sell no matter what the market is doing. Over long periods of time you will make an average of 8-10 percent and you never have to worry if your buying or selling at the right time.
Take a small amount of your investing capital, (say 5%) and invest in individual stocks and be prepared to LOSE all of it. This does 2 things. First it keeps you excited about investing and secondly, one day you’ll hit a big winner.
Keep in mind this advice is worth what your paying for it.
Good Luck!!!
Thanks, I appreciate your help; by the way is there a place on this website where I can ask general questions?
Get on the Financial Samurai Forum and you can ask anything, and create new topics as well. Lots of targeted information on there. It’s Sam’s brilliant yet mutually beneficial outlet for readers and Sam to stir the pot with less development effort on his part. You also (likely) won’t get called out for asking an off topic question… who knew the internet had so many rules.
Great advice. Lots of buyers are going to miss out on great deals because they were not preapproved.
Hopefully I can find myself a desperate Dow 18,500 seller as well!
For sure. I haven’t received much enthusiasm so far on my post on buying real estate during the pandemic. But what makes me happy is that I don’t have much enthusiasm when I publish the post down by the S&P 500 below 2400, and look how far we’ve rebounded.
I’m very thankful because there is so much in action in the world and fear. Is during these times were those who take some risk and really profit and get ahead.
Do you feel that the rally back up has happened too fast? For ex, Howard Marks stayed were 15% away from all time highs but we are more than 15% messed up (a few weeks ago). I’m benefiting from the marker going up but, seems like just happening too fast.
For ex, earning reports from Q1 reflect only 1 bad month out of 3. 2nd quarter could be bad but with all the money printing maybe we won’t go back down.
It sure feels very fast and too strong. But great for those who held on! I’ve been selling this week to get back down to a 20% equities allocation of net worth.
For example, I can’t believe I can sell my Tesla stock again at over $850 tomorrow after 1Q results. Nuts!
Thank goodness for second chances.
Hi Sam,
We are seeing some great real estate deals around Myrtle Beach & Charleston, SC.
The only way we can raise funds for a real estate purchase would be to sell rather large unrealized short term stock gains.
When you are selling these stocks as they rise & buying during panic / fear selling, how much attention do you pay to taxes?
We’ve always tried to lock in gains that will be taxed at the long term capital gains tax rate, but wonder if we’re emphasizing this too much.
Maybe it’s better to take the big gains when they are there & set aside money for when the tax bill comes.
Or are these trades mostly being done in a non-taxable account like an IRA?