What is ‘preapproval’ and why do you need it?

There is a myth out there that the real estate market is moving slowly and buyers have plenty of time to get everything together once they find a house or condominium they want. This couldn’t be further from the truth. The truth is there are some well-priced properties on the market or soon to hit the market, making them a ‘good deal’. When such properties reach the market, there are sometimes multiple offers from people who want to purchase. So, who is the lucky winner? Often times it is the person who has done their homework, and has their pre-approval letter in hand.

Many times, as real estate agents, we ask our potential buyers: “Do you have a pre-approval letter?” only to be told: “Oh yes, I’ve had a ‘chat’ with the bank,” or: “I was preapproved six months ago,” or “Financing won’t be a problem, believe me.”

While, we might believe you, it’s the current homeowner to whom you need to prove your financial status. Ask yourself, if the shoe where on the other foot and you were the seller, would you accept an offer with no initial proof of financing? Probably not.

Sellers won’t know how to respond to your offer unless you have a pre-approval letter in your hot-to-trot hand. When you have that letter, it puts you in a powerful position. Why? Because other buyers may not have a pre-approval and it can take three to six weeks to get it.

Why so long? Banks are being ultra-careful about how much they lend, and evaluating how qualified that person is to pay them back. Often pre-approval is contingent on paying off loans and credit cards in order to qualify, and that can take time. It is also dependent upon the purchaser supplying the bank with documents supporting their financial status — proof and balances of investments/deposit accounts, proof of address, proof of debits, proof of assets, proof of income, proof of monthly payments, et cetera.

Many people are unaware that they need between twenty five and thirty five percent of the purchase price — ready cash — to cover the bank’s down payment, and to pay for things such as stamp duty on the mortgage, conveyance stamp duty, legal fees for the conveyance, property insurance, the bank finder’s fee, bank appraisal, structural survey, et cetera.

If you are short of cash in this area, sometimes the bank will allow you to use a family property as collateral. However, that property will need to be appraised by an independent appraiser, who is selected by the bank, and then scrutinised by the bank, which can take up to two weeks or more.

Once you have a pre-approval letter, it is only valid for three months at the most. If your figures have changed for the worse (salary decrease, higher card balances, new lines of credit), when the application is reviewed again, the interest rate may have increased or you could be denied the loan.

Final words of wisdom: if you are not prepared, it will not only cost you time and losing out on the ‘home of your dreams,’ it could cost you money. If your offer has been accepted subject to contract and the agreement has been sent to your attorney, you will have attorney fees to pay.

Likewise, if you have had the bank perform an appraisal, there is a fee for this whether or not you are successful in purchasing the property.

Right now, we are all watching the Olympics — and we know one thing for sure, to be a winner you have to be ‘prepared’.

Buying a house is no different — be prepared with your pre-approval letter and you could be a winner too.

Heather Chilvers is a sales representative at Coldwell Banker Bermuda Realty

Contact information: e-mail hchilvers@brcl.bm or telephone 332 1793