Preapproval of mortgage important as home inventory drops

Visiting a banker or mortgage broker to find out exactly how much can be borrowed can give buyers a big advantage in today’s tightening housing market.

Q. We are just beginning to look for our first home to purchase. Our question is this: Is there a difference between getting “prequalified” for a home loan and getting “preapproved” for one?

A. Yes. Obtaining a formal loan pre-approval takes some time, but it’s always better than merely getting prequalified for a mortgage.

I have written about this issue before, but it has taken on even more importance today because the housing market is clearly on the mend and sellers are in a much stronger negotiating position than they were just a year or two ago. Sales have picked up in nearly every part of the nation, and the number of homes for sale has dropped sharply.

Real estate agents in many housing markets, from the East Coast to the West, are reporting that sellers are once again receiving multiple offers on the properties they have for sale — and that sellers are typically more prone to accept an offer from buyers who have been preapproved for a mortgage rather than those who merely have been prequalified for one.

Here’s the difference: A loan prequalification is simply a rough estimate of the amount of money that a lender, real estate agent or website suggests that a buyer can borrow to purchase a home. There typically is little or no paperwork involved, and the estimate is only a ballpark figure that doesn’t mean the buyer actually will be able to borrow anywhere near that amount.

Smart home shoppers instead get preapproved for a loan before they make an offer on the house or condominium that they want to buy. Gaining pre-approval would require you to complete a formal loan application, provide recent tax returns and related documents, and (sometimes) pay some upfront fees to get the loan process started.

Although getting preapproved takes extra work and sometimes some cash, it provides many benefits that a free prequalification does not. For starters, the pre-approval process will give you a much more accurate estimate of how much you realistically can borrow, based on your income, debts, credit score and other factors. As a result, you won’t waste time looking at properties you simply cannot afford.

Some sellers will even accept a lower bid from a buyer who has been preapproved for a mortgage rather than a higher offer from a buyer who is only prequalified, in part because the preapproved buyer has a better chance of getting the needed loan to complete the purchase and close the deal quickly.

Q. I am about to relocate to another state and have been looking on the Internet for a new apartment to rent. Is there a state law that limits how much a landlord can demand as a security deposit from a tenant before moving in? Landlords on the websites I have visited want applicants to put up an amount that’s equal to 30 or 60 days of the monthly rent, but a few want 90 days of rent, and one even wants a deposit equal to six months of rent!

A. Some states have laws that limit the amount landlords can charge as a security deposit — an amount that usually cannot exceed the equivalent of one or two months’ rent — but others set no limits at all.

There are two reasons why smart landlords always require a prospective tenant to pony-up a security deposit. The first, of course, is that the deposit can be kept if the renter intentionally trashes the house or apartment before moving out, or simply damages the property beyond normal wear and tear. The second is that the deposit usually can be kept if the tenant skips out before the lease term has expired.

I can’t give you a specific answer to your question, because your letter didn’t tell me the state where you plan to relocate. The state’s department of real estate, real estate commission or similar regulatory agency should be able to provide an answer.

Even if there’s no statewide law that limits the amount landlords can charge for a security deposit, it’s quite possible the particular city that you have chosen does. Cities and counties have the right to set their own local rental ordinances, so you also should contact your new city’s rent board or apartment-owners association for more information.

Q. If I create a living trust and put my house into it so my heirs can get the property quickly after I die, would transferring the property into the trust trigger my home loan’s “due on sale” clause and force me to pay the loan off in a lump sum?

A. No. The federal Garn-St. Germain Depository Institutions Act of 1982 specifically prohibits a lender from demanding that a mortgage immediately be paid in full (or make any other changes to the original loan terms) simply because a homeowner transfers his or her own home into a money-saving trust that they will control.

Real estate trivia: Almost 25 percent of all homes are owned by married spouses between the ages of 45 and 55 years old, according to the U.S. Census Bureau. Closely behind are couples between the ages of 35 and 45, with a homeownership rate of about 22 percent.

Ÿ For the booklet “Straight Talk About Living Trusts,” send $4 and a self-addressed, stamped envelope to David Myers, P.O. Box 4405, Culver City, CA 90231-4405.

© 2012, Cowles Syndicate Inc.