Question

The financing process involves several steps leading up to securing a loan and closing the transaction. Once the application is made the loan goes into "underwriting". During this stage the lender is making a decision on the creditworthiness of the buyer. This is one of the areas in which discrimination is allowed in real estate! Discrimination based on financial factors, such as ability to pay, income and FICA credit score. Would it be a good thing for a buyer to have a Pre- Approval? Why would a buyer go to the trouble of a Pre- Approval? How would the Seller and the Buyer benefit, if at all from a Pre-Approval?

Answer 1

Getting a pre-approval for a loan is beneficial for a buyer as it indicates financial readiness and creditworthiness to sellers, making their offer more appealing. Sellers benefit as it decreases the likelihood of financing issues. Pre-approval requires evaluating income, credit checks, and could involve cosigners or collateral.

Step-by-step explanation:

The process of securing a loan includes several steps, one of which is underwriting. During underwriting, lenders evaluate the creditworthiness of the potential borrower based on financial factors such as income, ability to pay, and FICO credit score. This form of discrimination is based on financial soundness, not on race, gender, religion, etc. A pre-approval is beneficial for buyers as it shows sellers they are serious and have the financial capability to follow through with the purchase, potentially making their offer more attractive compared to those without pre-approval.

Sellers benefit from pre-approval as it reduces the risk of the transaction falling through due to financing issues. On the other side, buyers with pre-approval can negotiate from a stronger position, knowing their loan is likely to be approved, and can close on a property faster. It is an indicator that the lender has already evaluated their credit and financial information and is tentatively willing to lend, subject to final verification of the buyer's financial status and the property details.

Furthermore, the pre-approval process involves scrutinizing income sources, past borrowing behaviors, and may also involve requirements for a cosigner or collateral. These requirements are set to ensure the borrower has the ability to repay the loan, protecting both the financial institution and the investor, should the loan be securitized and sold later on. However, buyers should be aware that excessive subprime lending practices and loans without proper income, job, or asset verification (NINJA loans) have led to crises in the past, and thus should commit to loans that they can reliably repay.