Sunday, February 24, 2008

Prequalification v. Preapproval: What's The Difference?

Guest Contribution from Michael Eastham, CPA
Certified Residential Mortgage Specialist &
Chief Executive Officer -
Global Lending Group
Phone: 407-388-1036 (ext. 140) /
140 N. Westmonte Dr #204 - Altamonte Springs, FL 32714

In the world of real estate transactions, professionals and purchasers sometimes use the words “prequalification” and “preapproval” interchangeably. The problem is they mean two totally different things. If you are using the wrong word in place of the correct word, you may find yourself in the throes of a very sticky situation.

Let me paint the picture for you: you are the potential buyer of a home, ready to make an offer on a house. Your realtor tells you that you need to get a “pre-qual” letter from your lender to submit with the contract. You receive the letter and give it to your realtor. The letter is then submitted with the contract and accepted by the seller. Great news! Or is it? The contract states that you must close within 30 days and you could not be more excited. Now, let’s fast-forward to day 28. Your lender calls you to let you know that your loan was declined.

How could something like that happen, you ask? You were pre-qualified! Well, this is one of those times when you must understand what the definition of “is” is. There are significant differences between being prequalified and being preapproved. Knowing what they are beforehand can determine whether you actually close on the transaction or not.

Having a pre-qualification simply means that you have had a conversation with a lender and based on the information you have submitted, (and assuming all of it is true and that you can document it) the lender believes that you will get the loan. This is a very simple thing to do. In a 10-minute conversation, I can determine a borrower’s debt-to-income ratio, credit score, amount of available assets, and what loan to value is needed for the borrower. However, one thing that is not included in this process is the documentation needed to support the loan request. Without this information, the lender runs the risk that any one of a hundred variables could shoot down the loan and it could be declined.

When you get preapproved, it means that your lender has not only reviewed your loan information as in the prequalification stage, but has also taken that loan through several other steps to insure loan commitment. All of the pertinent documentation to support the loan request has been collected and reviewed by the lender. This is called the credit underwriting stage, and it is critical to make sure that the borrower is credit approved. W-2’s, pay stubs and tax returns are reviewed in order to verify income. Employment is verified. Funds necessary for closing and post closing reserves are sourced using bank statements, investment statements, and retirement assets. The credit report is carefully reviewed and prior mortgage history is verified. All compensating factors are considered as the underwriter assures the lender that the documentation supports the loan request in accordance with the guidelines for the requested loan program.

Once the credit underwriting is completed, we are able to issue the “preapproval” letter that states the loan is approved, based on the credit worthiness of the borrower. The only unknown factors are those relating to the property. That is why this credit approval will always be subject to the borrower providing a fully executed contract and a satisfactory appraisal for the subject property. This is a significant point, because when buyers have been preapproved, they are for all intents and purposes, the equivalent of a cash buyer. They are typically in a much better negotiating position, and are much more likely to have their contract accepted by the seller.

If you are serious about getting the house you want, you must understand the difference between these two terms. It is important to have that “preapproval” when you submit the contract. That way you can submit your offer with confidence, knowing that the loan is ready to go as soon as you get the contract and the appraisal. Of course this takes a little more time, but that is where a little planning comes in. If you get started just a few weeks before you plan to go house hunting, I guarantee it will save an enormous amount of time, pressure, and anxiety on everybody’s part when you do find that “home of your dreams.”

Friday, February 22, 2008

Here's A Great Television Show for First Time Home Buyers

First time home buyers are always looking for help in understanding the home buying process. Wouldn't be nice to have a television show that represents the real estate transaction in a realistic light? Well....TLC could have another hit show on their hands.

My First Home brings the lives of first time home buyers to the television screen. Unlike some shows that depict the real estate process as seeing only three homes, making an offer on one and getting it to closing without issue, My First Home offers a more detailed, realistic perspective of the first time home buying experience by filming first time home buyer disappointments, anxieties and successes.

From previewing homes to picking out the perfect house, to waiting through escrow, to the final exchange of keys, My First Home cameras will follow real estate novices through the highs and lows of buying a first home.

Please visit my blog and make comments after watching an episode of My First Home on TLC. I am really interested in hearing your comments

Tuesday, February 19, 2008

First Time Home Buyers Should Know About Agency Agreements

This is the final installment in my series on Columbia SC real estate agency laws.

Here's a summary of the past articles.......

Part One - Discussing agency relationships with real estate licensees (agents) and defining your business relationship with said agents.

Part Two - What's the difference between being a Customer and a Client?

Part Three - Why should all home buyers should hire a professional real estate agent?

Part Four - My fiduciary duties to you as a real estate consumer.

Part Five -What are the legal types of agency relationships in South Carolina?

Let's close this series by discussing agency agreements and summarizing your real estate representation choices.

When you choose client-level service, your written Agency Agreement or your agent should answer these questions:

  • Can you work with other real estate Companies during the time of the Agreement?
  • What will happen if you buy or sell on your own without the agent?
  • When will your Agency Agreement expire?
  • How will the real estate Company be paid for its services?
  • Does the real estate Company represent both buyers and sellers as clients?
  • What are the choices if two clients become involved in one transaction?
  • What duties will the real estate Company continue to provide me after the transaction is completed?

If you plan to become a client of a real estate licensee (agent) and their real estate Company, the licensee should explain the agreement to you fully and should answer questions you may have about the agreement.

Remember, however, that until you enter into a representation agreement with the Company, you are considered a customer and the Company cannot be your advocate, cannot advise you on price or terms, and cannot keep your confidences.


As a real estate consumer in South Carolina, it is your choice as to the type and nature of services you receive.

The choice of services belongs to you - the South Carolina real estate consumer.

If you ever have questions about Agency Relationships in Real Estate, please feel free to email me at

Monday, February 11, 2008

The Chicken or The Egg - Who Should First Time Homebuyers Hire First?

If you visit the online resource provided by Merriam-Webster, you will find the following...

chicken–and–egg (adj.): of, relating to, or being a cause-and-effect dilemma

Etymology: from the proverbial question “which came first, the chicken or the egg?”

Date: 1959

You've decided to buy a home! Congratulations!

Let me guess......You have a question.

What is the correct first step in purchasing a home?
Actually...this question is probably one of the first questions asked by most home buyers.

Should you call a bank or mortgage company and obtain a preapproval or should you call a REALTOR® and discuss current market conditions? The answer to this "chicken or egg" argument will set the stage for a smooth or rocky home buying experience.

In my opinion, your first hire should be the professional that can put the F.A.T. in your home buying experience. What's F.A.T.? You are full of good questions.

F.A.T. is an acronym that represents the key qualities of a real estate sales professional. A real estate sales professional should be a great Facilitator, Advocate and Taskmaster.

If you do not hire a REALTOR® with these traits early in the process, you might be on the road to wasting scores of hours, gallons of gasoline and thousands of unnecessary dollars during the home buying process.

Why do you need a facilitator? Purchasing a home requires involvement from several professionals from different industries. You will encounter home inspectors, termite and heating & air specialists, attorneys, homeowners and other real estate agents. All of these parties have a hand in a real estate transaction. You need to find someone that can facilitate the involvement of these aforementioned professionals. Most mortgage loan officers do not have this in their job description.

However, being a facilitator is not enough. While facilitating these professionals, you want someone to work on your behalf.......An Advocate!

South Carolina Agency Law and the REALTOR® Code of Ethics charges REALTORS® to put your interests ahead of others at all times!

Reputable lenders will follow those principles. However, how do you know that home inspectors and other real estate agents are putting your interest ahead of theirs? That's right! You don't!

To guarantee having an advocate that has a fiduciary duty to work in your best interest, you should enter into a SIGNED AGENCY AGREEMENT with a REALTOR®.

Thirdly....You must have a Taskmaster that has years of experience in working as a facilitator and an advocate.

While doing some research, I came across a Marvel Universe fictional character named Taskmaster. Taskmaster possessed an arsenal of weapons and was a trainer of super villain henchmen. He has the ability to masterfully mimic the physical movements of anyone he witnesses.

Even though Taskmaster was a villain in the Marvel Universe, a good REALTOR® should possess and use their powers to slay the pitfalls (villain) that can challenge your home buying process. Without those traits, you home buying experiences could be full of frustration and disappointment.

In conclusion, an egg mostly brings forth only ONE CHICKEN. However, a chicken can look over many eggs. Do you want to start the process with someone that can represent only one egg in the home buying process or should you start with the person that oversees all the eggs?

The choice is yours! However, my advice would be to hire a chicken with super powers that can put the F.A.T. into your home buying experience.

Saturday, February 9, 2008

First Time Home Buyers Should Know About Agency Types

This is Part Five in my series on Columbia SC real estate agency laws.

In Part One, I expressed the importance of discussing agency relationships with real estate licensees (agents) and agreeing on your business relationship.

In Part Two, I wrote about the difference between being a Customer and a Client.

Part Three discussed the importance of some sellers and all home buyers becoming Clients.

Part Four stated my fiduciary duties to you as a real estate consumer.

This installment will discuss three types of Agency Relationships in South Carolina and how they impact you during the real estate sales process.

First, Let's discuss Single Agency. When a real estate Company and its associate licensee represents only one client in the same transaction (the seller or the buyer), the relationship between the Company and the seller/buyer is called Single Agency. Approximately 93% of my clients have entered into a Single Agency relationship with me. After reading the remaining portions of this post, you will understand the importance of that statement in reaching your real estate goals.

Let's turn our attention to the second type of agency.

Designated Agency came on the South Carolina real estate scene on January 1, 2005. In designated agency, a broker-in-charge (which is the personification of a real estate Company) may designate an individual associated licensee to act solely on behalf of each client. These designated agents have a duty to promote the best interest of their clients, including negotiating a price.

The broker-in-charge remains a disclosed dual agent (which will be address shortly) for both clients, and ensures the assigned agents fulfill their duties to their respective clients.

At the time you sign an agency agreement, you may be asked to acknowledge whether you would consider giving written consent allowing the Company to designate a representative for you and one for the other client in a designated agency.

For example....If I am representing you on the purchase of a home that is listed by my office colleague Lisa Davey, Lisa and I would be designated agents in that transaction and our broker-in-charge Margaret-Ann Ashburn would be a disclosed dual agent.

Disclosed Dual Agency exists when the real estate Company has two clients in one transaction – a seller client and a buyer client. At the time you sign an agency agreement, you may be asked to acknowledge whether you would consider giving written consent allowing the Company to represent both you and the other client in a disclosed dual agency relationship.

In a disclosed dual agency, the Company's representation duties are limited because a buyer and seller have recognized conflicts of interest. Both clients' interests are represented by the Company.

If I became a disclosed dual agent in any real estate transaction, I could not advocate on behalf of one client over the other, and cannot disclose confidential client information concerning the price negotiations, terms or factors motivating the buyer/client to buy or the seller/client to sell.

Hence....about 93% of my clients enter into Single or Desigated Agency agreement with me. It is important for my clients to have an advocate throughout the entire real estate sales process that is committed to your best interests.

In the final installment of this series, we'll discuss what to expect in an agency agreement.

Tuesday, February 5, 2008

First Time Home Buyers Need a Reputable Mortgage Officer

After reading a post from my Guest Contributor Jorge Merlos, I had an epiphany. I hadn’t given you a real life example of a reputable loan officer in the Columbia area. Hence….this post is dedicated to correcting my faux pas.

There is a lady that is unique in several ways and brings her artistic creativity to the world of mortgage lending.

Let me introduce you to Leah Avery with Bank of America. She can be reached at (803) 255-7759 or you can email her at LEAH.AVERY@BANKOFAMERICA.COM

Patterson Group has teamed with Leah and her fellow loan officers to market a full range of banking products and real estate services to Columbia, South Carolina real estate home buyers.

Leah is a Columbia native and a Graduate of The University of South Carolina. Yes…Clemson Fans. Leah will still get you a great mortgage for your home.

Leah will meet to discuss your financial needs and analyze your credit and financial information in preparation to obtain the best mortgage option for your purchase while minimizing closing costs.

Leah sends this list of items to post. These are some items needed to assist her efforts to help you.

*2 years W-2s...Most loan programs will require that the borrower provide only the previous year’s W-2 statement. However, some government programs will want to review two years. If you are self employed, you’ll need to bring your entire return for the previous 2 years.

*Bank Statements...Lenders require a 60 day history of all active bank accounts. It is with these documents that funds to close are verified, etc.

*Current pay stub...Pay stub(s) will assist the lender in verifying monthly gross income, as well as what the borrower has earned year to date. Most loan programs will require only one pay stub, while several government programs request pay stubs for the previous 30 days.

*Driver’s License...Your lender will verify your name, address, etc. with your driver’s license. Please be sure to take your license to closing as the attorney may also verify your information.

*Other Income...If your qualification is based on other forms of income including child support payments, bring documentation (cancelled checks, etc.) to prove verification of such income.

The process of applying for a mortgage can be the source of much anxiety.

If you plan to meet with any lender in the near future, these aforementioned documents should be with you upon arriving at the lender’s office. This will contribute to expediting approval of your mortgage application.

If you like reading this type of information, SUBSCRIBE to this blog.

Friday, February 1, 2008

Buying a New Home? Consider Its Future Resell Value NOW!

Guest Contribution from Darleen McCullen, Broker
Keller Williams Realty - Raleigh, North Carolina
Phone: 919.454.8864 /

I was out for my morning walk earlier this week, and for the first time really "looked" at a set of new town homes near my residence. They're nice homes, but they back up to a busy street!
I thought to myself:

What were these people thinking when they purchased these town homes??

"Were they so anxious to live the American Dream that they weren't thinking about the location of the home?"

"Did the Builder give them incentives to purchase these homes that they didn't carefully consider the location - and the noise they'd hear inside the home at various times of the day?

DID THEY HAVE A REALTOR® to advise them?


When I am working with Buyers, especially first-time home buyers, I always advise... "Buy with the end in mind."

Buyers sometimes purchase what they consider to be the "perfect" home for them - without considering that they may wish to resell it in the future. The next buyer may not appreciate the fact that the home backs up to a busy street.

If trying to resell such a property, it may be necessary to cut the price to get rid of it. Home sellers, of course, want to protect their equity. So buying right in the first place will certainly help!

Yes, I believe there will eventually be a buyer for every property. But the question is "At what price will the buyer come?"