Mortgage Credit Approval and Your Negotiating Position
Updated: Mar 1, 2020
When our clients make an offer on a property it is important that they be in the strongest negotiating position possible. The strongest position is to say to the seller…”I’ve got cash; we can close as soon as legal papers are drawn.” The second strongest position is to say …”We are credit approved to purchase this property.” It tells the sellers that they are not taking a risk of whether this buyer will qualify for a loan when they take their property off the market and it tells them also that this buyer can likely close more quickly than another buyer who is not fully credit approved. We take advantage of that negotiating position by telling the seller up front…”We know we are offering less than you might receive from another buyer; the fact that this buyer is credit approved and can close quickly adds value to their offer in lieu of a higher offer price.” Additionally you are saying to the seller …”there is no question as to whether I can purchase this property; is there anything wrong with the property (to be identified through inspections) that may cause me not to buy it?’ That shift is powerful in the negotiating process. It can shift the burden of proof to the seller that his property is worth whatever you are offering.
We are asking you to be credit approved by a lender which is different than being pre-qualified for a mortgage loan. When you are pre-qualified it means that the mortgage lender does not see anything initially that would cause you not to be approved subject to you providing documentation such as income, length of employment, and personal loan information. The lender may also obtain an “in-file” credit check as a car dealer would do. It does NOT mean that the lender has made a credit decision; it does NOT mean that your loan is approved for sale into the secondary market subject to the property being appraised and a final review of documents that you will be asked to provide. In this case you have probably not met with the lender and have not completed a standard loan application. While some lenders may even send a certificate of some kind indicating that you are pre-qualified for a loan, it is a preliminary step in what we are asking you to do. With credit approval the mortgage lender has verified your documentation and actually approved the loan either through a program called “desk-top” underwriting or alternatively the loan has been approved to be held within the lender’s own loan portfolio (such as a credit union). Loans approved by desk-top underwriting are often sold into the secondary market even before an appraisal is completed on the property. With credit approval the credit side of the loan underwriting is done unless something changes before closing.
After interviewing with us and if you select our Company to represent you as your buyer’s agent then we ask that you make a full loan application to put yourself in the strongest negotiating position possible before we get too far into the house selection process. We can provide you information on several mortgage lenders to choose from and also an article which should assist you in comparing mortgage lenders and selecting one. We can also provide a spreadsheet for you to compare lender “origination” charges. Whomever you select is your choice. We simply want to provide contact information and a brief summary of the experience of our former clients with selected lenders whom they have recommended. We frequently interview to find new lenders and we also follow-up with lenders on our list so that the list we provide often changes.
Most mortgage lenders want you to give them money up-front for an application fee or for them to order a credit report for your loan processing. Giving any mortgage lender money up-front is a strategy to get you committed to them and makes you less likely to shop other mortgage lenders. We see NO REASON for you to give any mortgage lender money up-front just to compare their origination costs with a competitor mortgage lender. Mortgage lenders often are going to initially obtain an “in-file” credit report as would a car dealer which has a minimal cost. Only later will a lender actually order a full three-credit-bureau-merged-credit-report that has a shelf life of 90 days so there is no reason to pay for a full credit report up front. Ordering a credit report too soon can also result in another credit report being ordered just before closing which doubles the credit report cost to the buyer.
Another good reason to be pre-approved before getting to far into the house selection process is that it has been reported that nationally approximately one-third of all credit reports have some material errors. If you have errors in your credit reports you will want to know that as soon as possible because it can take time to get errors corrected that could delay your home purchase.
Once you have selected a lender and made a full loan application we will be asking the lender if you are “locked” into an interest rate to protect you for a specific period of time such as 30 or 45 days. If you might lose a favorable interest rate on your loan after a particular day, we want to know that before you negotiate a contract. If, for example, it is your best interest to have an FHA or VA loan instead for a conventional loan, we need to know that to assist you to negotiate and structure the purchase contract accordingly.
Mortgage lenders will offer you a “buy-down” to reduce your interest rate. There is a formula to determine the break-even point in months where it is in your benefit to pay for a buy-down and we can show you how to calculate that. The decision whether to buy down a loan requires you to estimate how long you expect to be in the house you are buying and where you think interest rates might be at the break-even point. More detail about that is in a separate article.
In summary, our job as your buyer agent is to put ourselves in your shoes and protect your best interests whenever and however we can. Our relationship with a lender is to work for the best interest of you, our mutual client. More information is on our website in various locations including Frequently Asked Questions.