Pre-Qualification vs. Pre-Approval; Buyer Success Strategies for a Competitive Market
The terms pre-qualified and pre-approved sound pretty interchangeable. In fact, there is a huge difference, which I promise to explain! But, before I get into that, let me address a more basic question. "What is a pre-approval and why do I need one?"
Here in Marin County, our real estate market, though active, has experienced a severe shortage of inventory for quite some time now. A recent check revealed slightly over a one month supply of homes for sale, while 4-5 months is considered healthy by many agents and analysts. One important cause of this shortage is the perception by potential sellers that prices are still too low for them to sell. With recent appreciation in the market, this is not necessarily the case, but it will take a while for this information to filter down and be absorbed by the average homeowner. In fact, it is a great time to sell! With many buyers chasing too few homes, it's not unusual for attractive listings to receive multiple offers, often over asking price.
When I represent buyers, I want to help my clients position themselves in the best possible way to be selected by the Sellers and their agent from a possible pool of attractive buyers. Of course, listing agents and sellers look at price and terms, but really good listing agents also advise their clients to look at the ability of the Buyer to close the sale. (Accepting one or more "backup offers" is also a common strategy.) The last thing that sellers and their agents want is for a deal to fall through requiring them to place the home back on the market. At that point, the property often sells for less money than the original contract, sometimes substantially less. I cannot count the times I have seen listings come back on the MLS with a note that says something like: "Back on Market. No fault of property. Buyer could not perform." This is where a pre-approval comes in.
In today's Marin County real estate market, it is assumed that all offers will come with pre-approval (not pre-qualification) letters. And local lenders, who are familiar with the quirks, characteristics, and requirements of our market, are preferred. A pre-approval is understood to mean that the lender has received a completed application and has verified income, assets, and employment. The lender should be prepared to write a letter stating that the buyer is pre-approved up to X$, and the loan is subject only to appraisal and maybe one or two other items. A pre-qualification, on the other hand, often means the lender just ran a credit report and asked a few questions. When the application process is initiated, there can be some unpleasant surprises! Taking the time to get a pre-approval in advance from a local lender can give a buyer a huge advantage over the buyer who has not. Your dream home may be just around the next corner. When it comes into view, make sure you're ready--- get pre-approved now. If your home search takes longer than expected, the pre-approval can be easily updated from time to time. Your agent can recommend experienced and capable local lenders.