Why Pre-Approvals Are for Realtors
(Ten-minute read time)
Enhance your real estate business and client satisfaction with the right mortgage pre-approvals. This guide offers insights into the types of pre-approvals, outlines the key benefits of pre-approvals for agents, and will provide you with actionable tips to support your clients efficiently.
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Why Are Pre-Approvals for Realtors?
As a realtor, understanding pre-approvals can help you guide clients more effectively in their purchasing journey, ensuring they look at homes within their budget. This makes buying smoother and boosts your reputation. To learn more about Pre-Approvals, check out our article: Do I Need to Get a Mortgage Pre-Approval?
Clearing Up Misconceptions About Pre-Approvals for Your Clients
By providing your clients with accurate information, you can ensure they have realistic expectations and are better prepared for the homebuying journey.
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Fact: A pre-approval is not a guarantee of a loan. It is a lender's preliminary assessment of a buyer's ability to borrow based on their current financial status. Final approval comes after a more thorough check, including an appraisal of the property.
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Fact: Getting pre-approved doesn’t bind a buyer to that lender. Buyers are free to shop around and choose different lenders for their final mortgage application.
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Fact: While pre-approval does require documentation, the process can be quicker than many buyers expect. Many mortgage brokers offer virtual appointments for your convenance.
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Fact: When a lender performs a credit check for pre-approval, it results in a hard inquiry. The impact is minor and your score will recover naturally. You worked hard to build your credit score, now is a great time to use it.
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Fact: Pre-qualification is a less detailed, often verbal review of a buyer’s financial situation, and less rigorous than a pre-approval. Pre-approval involves a more comprehensive review of financial information and credit history.
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Fact: You don't need a perfect credit score for pre-approval. Lenders consider the whole financial picture, including income, debts, and down payment amount. Buyers with less-than-perfect credit can still get pre-approved.
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Fact: Pre-approval benefits both the buyer and the seller. For the buyer, it clarifies their budget and improves their negotiating position. For the seller, it provides assurance that the buyer is serious and has the financial backing to complete the purchase.
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Fact: A pre-approval will lock in your rate, but you can always take a better rate if it’s available. Some lenders will protect your savings if the rate is down.
Over 90% of homebuyers don’t start with the financing
Many Buyers Are Not Prepared
Only 9% of homebuyers start by talking to a lender, meaning many clients haven't prepared.
Buyers expect that it will take them about 13 weeks on average to find a house. Consider the time and cost wasted on inaccurate pre-approvals.
The Right Kind of Pre-Approval
When navigating the real estate market, both realtors and their clients aim for a seamless transaction. However, not all mortgage pre-approvals are created equal. A true pre-approval – the right pre-approval – is not just a superficial estimate but a comprehensive review that genuinely reflects the buyer's affordability.
The "right pre-approval" goes beyond mere surface-level assessments typically found with basic mortgage calculators. It involves a thorough examination of the client's financial situation, creditworthiness, and other relevant factors, ensuring that the pre-approval is accurate and reliable. This deeper level of validation helps realtors and their clients to confidently move forward, knowing the mortgage they are pre-approved for is truly attainable and aligned with their financial capabilities.
Types of Pre-Approvals
Your buyer clients might not be aware that not all pre-approvals are created equal. As a realtor, understanding the variations between different types of pre-approvals and their respective levels of scrutiny and value is crucial. Below is a list arranged from those with the least to the most scrutiny and value.
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This is the most basic form of pre-approval where the lender provides a preliminary interest rate for a specified period, typically ranging from 60 to 120 days. This type of pre-approval offers minimal scrutiny, as the lender usually relies on the borrower's self-reported information without verifying income, assets, or credit history. A “Surface-Level” Rate Hold has no value except the rate if the client qualifies.
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Involves a brief assessment of the borrower's financial situation based on self-reported information. It provides an estimate of the loan amount the borrower may qualify for. This type of pre-approval has limited scrutiny as the lender may not perform a credit check to evaluate the borrower's creditworthiness or review any documentation. Initial Pre-Qualification provides the same benefit as obtaining an assessment with a basic mortgage calculator.
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A more comprehensive assessment where the lender reviews the borrower's key financial documents, such as pay stubs, bank statements, or tax slips. It provides a conditional approval subject to further verification. This type of pre-approval requires moderate scrutiny for the borrower, as the lender verifies the borrower's income, assets, and credit overview to determine their eligibility for a mortgage. Conditional Pre-Approval is okay for estimating the budget, but not for any serious offers.
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The most rigorous form of pre-approval where the lender thoroughly evaluates the borrower's financial profile, including employment history, debt-to-income ratio, and credit score. It provides the same level of analysis that will be done on the mortgage application to ensure the same result. A high level of scrutiny is involved as the lender conducts a comprehensive review of the borrower's financial documents, employment verification, and credit report. This type of pre-approval carries more weight in the homebuying process and offers greater certainty to both the borrower and seller. This type of pre-approval provides the highest level of confidence and minimizes risk for all.
Don’t just casually ask your buyer, “So, how are you guys with financing?” — it’s just not enough.
Comprehensive pre-approvals protect your clients and your business.
Buyers for Whom Comprehensive Pre-Approval is Crucial
Since you are assisting clients who have diverse financial backgrounds, it's crucial to understand the importance of comprehensive pre-approval. Here are the types of buyers who will benefit from comprehensive pre-approvals:
First-Time Homebuyers: Lack of experience in the homebuying process necessitates a thorough understanding of their financial standing and borrowing capacity. How much extra time do you have to talk through all the financial questions?
Self-Employed Individuals: Variable income and complex financial profiles require a detailed assessment to accurately determine mortgage eligibility. How confident are you that their rate hold is maximizing their purchasing power?
Buyers in Competitive Markets: In hot real estate markets where multiple offers are common, a strong pre-approval can strengthen a buyer's offer and give them a competitive edge. How likely are you to lose out to a better offer from a more prepared agent?
Buyers with Unique Financial Situations: Individuals with non-traditional income sources, such as freelancers or investors, may benefit from a comprehensive pre-approval to address potential lender concerns. How many times have you disqualified potential clients because it didn't look like they could get approved?
Buyers Planning to Make a Large Purchase: Those intending to make significant purchases in the near future, such as a car or major home renovations, should secure a pre-approval to avoid negatively impacting their credit score. How often do buyers forget to disclose that they've applied for credit for something like furniture in anticipation of their moving day?
Benefits of Pre-Approvals for Buying Agents
Filter Out Unqualified Clients: By filtering out unqualified clients through pre-approval, realtors can focus on financially ready clients, increasing the likelihood of a successful transaction.
Targeted Searches: With a pre-approval in hand, clients have a clearer understanding of their budget and purchasing power, allowing you to focus your search efforts on properties that align with their financial capabilities and preferences, thereby optimizing your time and resources.
Strengthen Negotiations: Sellers and listing agents are more likely to view pre-approved offers as more serious and credible, giving you a competitive edge in negotiations and maximizing your client’s chances of securing their desired property.
Faster Process: Clients already vetted financially means quicker transactions and fewer delays.
Lower Deal Failure Risk: Pre-approval minimizes the chances of financing-related deal breakdowns, protecting your potential income and maintaining positive client relationships.
Boost Trust & Reputation: Work with pre-approved clients to show you're serious and reliable, improving your status in the real estate community. Additionally, building strong ties with mortgage brokers and lenders through the pre-approval process can create more referrals and enhance your professional network.
Improve Revenue: With a pre-approval, clients may discover that they qualify for higher mortgage amounts than anticipated, opening up opportunities for upselling and potentially leading to larger transactions and increased commissions for you as the realtor.
Get More Deals Done: In a competitive real estate market, having pre-approved clients positions you as a more attractive agent to sellers, who are more likely to prioritize offers from buyers with confirmed financing in place, potentially leading to quicker transactions and more successful negotiations.
More Referrals: Guiding clients through the pre-approval process demonstrates your commitment to their best interests and financial well-being, fostering trust and ultimately leading to higher client satisfaction and referrals.
Benefits of Pre-Approvals for Listing Agents
More Serious Offers: Pre-approved buyers are generally more committed and serious about their purchase, leading to more solid offers on listings.
Reduced Risk of Deal Fall-Through: With buyers' finances pre-verified, there's a lower likelihood of deals falling apart due to financing issues.
Smoother Sales Process: Pre-approval streamlines the sales journey, reducing delays and uncertainties related to buyer financing.
Enhanced Seller Confidence: Sellers are more inclined to accept offers from pre-approved buyers, enhancing the listing agent's reputation and reliability.
Faster Closings: With financial assessments completed early, the time from offer to closing is significantly reduced.
Better Negotiating Position: Listing agents can negotiate better terms, knowing the buyer's financial capabilities are already vetted.
Professional Credibility: Demonstrating a preference for pre-approved buyers enhances the listing agent’s professional image and market standing.
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Why Pre-Approvals Matter: Consider These Examples
Case 1: The Missed Opportunity
Scenario: Jane, a realtor, was assisting the Smith family in purchasing their first home. Eager to close the deal quickly, she encouraged them to quickly get a rate hold for their pre-approval. The Smiths found their dream home and made an offer that was initially accepted. However, when the seller received a similar offer from a buyer with a Fully Underwritten Pre-Approval, they chose the latter, deeming them more financially reliable.
Outcome: The Smith family missed out on their dream home due to the perceived uncertainty of their financial backing. Jane lost the trust of her clients and the potential sale, reflecting poorly on her professionalism and understanding of the mortgage process.
Case 2: The Unforeseen Financial Hurdle
Scenario: Bob, a seasoned realtor, worked with the Harrison couple, who said they had run the numbers. Believing this was sufficient, Bob didn't push for a more detailed pre-approval. Midway through the conditional period, a more in-depth review of the Harrisons' finances by the lender revealed a significant debt that was previously undisclosed. This revelation altered the Harrisons' borrowing capacity, making them ineligible for the loan amount needed to purchase the home.
Outcome: The deal fell through, causing significant stress and disappointment for the Harrisons and a lost commission for Bob. This incident damaged Bob's reputation, as he failed to ensure his clients were thoroughly vetted financially before making an offer.
Case 3: The Last-Minute Financing Fallout
Scenario: Sarah, a realtor, guided her client, Mr. Thompson, towards a pre-approval at their bank branch where the basic documents will be reviewed assuming it offered enough assurance for a home purchase. Mr. Thompson entered into a purchase agreement for a home he loved. However, during the final verification stage, discrepancies between his reported income and the documents provided led to the lender revoking the pre-approval.
Outcome: Mr. Thompson lost the home and his deposit, as he couldn't secure financing in time. Sarah's oversight in not recommending a Full Underwritten Pre-Approval resulted in a significant financial and emotional setback for Mr. Thompson and a dent in Sarah's credibility as a realtor.
Tips for Realtors on How to Assist Clients in Getting Pre-Approved
Here are some key tips on how you can guide your clients effectively through the pre-approval journey to ensure a smoother, faster path to homeownership:
Educate Your Clients Early: Start by explaining the pre-approval process and its benefits as early as you can. Many buyers, especially first-timers, might not understand what mortgage pre-approval is or why it’s important. Outline what steps are involved for a pre-approval and the many benefits such as how it can strengthen their offer, help them shop within their budget, and speed up the buying process.
Explain the Financial Benefits: Make sure your clients understand how being pre-approved can give them a competitive edge, especially in a seller's market. Explain that sellers are more likely to take their offer seriously if they know it's backed by lender approval.
Assist with Questions: Be ready to answer any questions they might have about the process or direct them to someone who can. You don’t have to be a finance expert, so don’t shy away from answering questions — remember that your deal is on the line.
Highlight the Importance of Accuracy: Emphasize the need for honesty and accuracy in their application to avoid issues later on. Make sure they understand that the pre-approval is based on their current financial situation, which shouldn’t change significantly before buying a home.
Encourage Prompt Action: Let them know that mortgage pre-approvals have expiration dates, so they should be ready to start their home search soon after receiving one.
Build Relationships with Lenders & Mortgage Brokers: Recommended lenders and/or mortgage brokers to your clients with whom you've had positive experiences in the past. Personal recommendations can go a long way.
Follow-up: Check in with your clients to see if they’ve taken steps to get pre-approved. Offer assistance if they’ve hit any roadblocks.
Reiterate the Benefits: Throughout the buying process, continue to emphasize how being pre-approved makes them more attractive buyers and can streamline their homebuying journey.
Conclusion
Quality mortgage pre-approvals are more than just a preliminary step in the homebuying process; they are a foundational element that can enhance the efficiency, reliability, and outcome of real estate transactions for both buyers and agents. By understanding the different types of pre-approvals and guiding your clients through the process, you can ensure smoother transactions, strengthen your professional reputation, and build trust with your clients.
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