You’ve heard of a pre-approval, but in today’s overly-aggressive seller’s markets, you may need a little something extra to help your offer stand out. That’s where pre-underwriting comes in.
I’ll explain what this process is, how it works, and why it may just be the thing that helps you become a homeowner. Keep reading to see if this lesser-known financial move is the right fit for you.
What is pre-underwriting?
If you’ve been thinking about buying real estate for a while, you probably know that you should get a pre-approval. This document shows the seller the maximum amount that the bank is willing to loan you, provided you meet certain conditions like ensuring you have a stable financial history. It offers reassurance of your ability to get a loan, rather than a guarantee.
Pre-underwriting essentially takes the promise of a pre-approval a step further. With this, the mortgage company has already vetted your financials and agreed to give you a mortgage up to a specified price. This time, it is a guarantee. By the time you submit an offer on your home of choice, you’ll have already cleared any conditions that the mortgage company may have and they’ll have given you a firm commitment letter.
Why pre-underwriting makes a difference
Taking this extra step can help make your offer more attractive to sellers. Since you already have a firm commitment in hand, you don’t need to include a financing contingency, which would allow you to back out of the deal if you were unable to get financing. Offers with fewer contingencies usually go over well with sellers because there are fewer opportunities for the deal to fall apart.
The lack of a financing contingency will put you on par with cash buyers. However, since you’re still mortgaging the property, you’ll likely have more flexibility when it comes time to decide what to offer. You may be able to outbid them, which would put your offer at the forefront.
How pre-underwriting works
With a pre-approval, your financial documentation—like W-2s, pay stubs, and bank statements—typically stays with your lender. He or she will look through it to make sure there are no real red flags and will probably run a credit check before issuing your pre-approval. However, your financials won’t truly be examined until after your offer has been accepted.
In the case of pre-underwriting, the examination happens upfront. You’ll need to present the same financial documentation as you would for a pre-approval. However, this time, your documents will be handed off to an underwriter, usually one that’s in-house. He or she will thoroughly vet your financials to evaluate the risk associated with granting you a loan and then, either sign off on a commitment to give you the loan or reject your application.
Since pre-underwriting is a more intensive process, it takes an expert and it takes time. If you decide to go this route, you’ll want to choose a mortgage company that has in-house underwriters and experience with these types of loans. You’ll also to leave a few weeks to undergo the underwriting process before you decide to submit an offer.
When pre-underwriting might be worth it
Pre-underwriting isn’t necessary for everyone. In most cases, a run-of-the-mill pre-approval will serve you just fine. That said, in highly-competitive markets, it may just be the thing that gives you the edge over other buyers.
Think about using pre-underwriting as a tool if you’re in a highly-aggressive seller’s market, if you’re up against a lot of cash buyers, or if you’ve lost out on multiple properties and are looking for something else to help your offer stand out from the crowd.