Q. Tom, we may be in the market to purchase a home in the next 3-4 months and we want to ensure that we are in the best position possible to obtain a loan; please explain the difference between being ‘pre-qualified’ versus being ‘pre-approved’ by a lender?
This is a very insightful question because not everyone is loan-worthy in today’s strict lending environment. Being pre-qualified means you may be eligible to obtain a loan based on what you have told your lender, being pre-approved means that the lender has verified your verbal information as accurate thereby insuring you will get a loan. The verification process includes confirming your credit score, bank deposits, assets & liabilities, employment and a documented history of your compensation. And it is in the documentation process where everything has changed in recent years in the lending business. Prior to the late 2007 real estate market correction, a loan applicant could actually write on a loan application any salary amount he or she wished and the figure was not verified. A person making $50,000 annually could actually write in $250,000 and no one would check it out. It was called a no-documentation loan. In today’s environment, it is hard to believe business was even done that way. As a result, yesterday’s lending guidelines are today’s lending restrictions, based on very exact underwriting debt to income ratios. And everything must be documented. So, the bottom line best advantage for you as a potential buyer and borrower in today’s marketplace is to be pre-approved by an experienced mortgage provider – that is the leverage from which you will benefit tremendously once you make an offer on any home. And, by the way, once your lender pre-approves you, don’t change anything—don’t change jobs, buy a car, pay off any debts, take out a furniture loan, accept any monetary gifts from family members and don’t move any money around from account to account, as it will inevitably affect your loan approval status to your detriment. The upside to all of this: mortgage payments that borrowers can actually afford and a lower loan default rate that in the long run will ultimately benefit everyone.
Q. Home warranties seem to be a prevalent part of most real estate transactions here in the Diablo Valley; how do they work and why would I want to pay for one?
You are right, home warranties are very popular especially here in our area. A home warranty is a one-year insurance protection plan that provides for repair or replacement of the major mechanical, electrical and plumbing components in a home should a component require repair or outright fail to function properly. There is a one-time service deductible fee (typically $55) for each service call; after that the home warranty company has the option of repairing the item or replacing it. The contracts do have exclusions and there are limits to ultimate replacement costs but generally both buyers and sellers see the advantage of having a home warranty in place. The cost of a typical home warranty starts at about $350 annually and will increase based on coverage options (washer, dryer, refrigerator) and square footage; most of the time the seller will pay the one-year fee as an expected cost of selling a home. Professionally speaking, I recommend home warranties to 100% of my clients and personally speaking, I annually renew the warranty on my own home as it provides peace of mind should an unexpected and potentially costly repair arise.
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