If you are in the market to buy a home and need financing, obtaining mortgage pre-approval before shopping for a home is the most essential first step, especially given the past shifts and trends in the market. Having a pre-approval letter helps demonstrate a buyer's financial readiness and strengthens their position when making offers on homes. This practice has indeed become an important aspect of the homebuying process in many places, including San Antonio.
During the pandemic (starting in March 2020), San Antonio home prices skyrocketed to all time highs. The big reason for this had to do with supply and demand. There was a low supply of homes and high demand from buyers looking to buy a home in the San Antonio area. Both new home construction and re-sale homes were in short supply. Additionally, interest rates during the pandemic were still around 3-4%. Many people from other states were relocating to the San Antonio area to take advantage of the low cost of living. The market was full of buyers looking to take advantage of the low interest rates, the low cost of living and hot real estate market in San Antonio. The low supply of homes and large number of home buyers drove home prices up. Many homes ended up in multiple offer situations. With so much competition for homes, it became essential for buyers to provide proof of financial ability with all offers. For cash buyers, it meant to they had to provide proof of funds in the form of a bank statement at the time the offer was presented. For financed buyers it meant that they had to provide a pre-approval letter from a financial institution showing they were pre-approved to make a purchase. It provided the opportunity for buyers to know their financial ability before submitting an offer. For sellers it was easier to determine who were serious buyers and who were not.
Before the pandemic it was common that offers were presented without proof of funds or pre-approval letters. I like to tell me clients, that the custom of providing a pre-approval letter or proof of funds with an offer on a home is a lasting legacy of the pandemic era market we had in San Antonio. This practice is still in effect today, and in fact has become the policy of many brokerages to send or receive an offer from another agent. Almost every listing I come across on the MLS says that proof of funds (POF) or Pre approval letter must be submitted with all offers. It makes sense that after experiencing a surge in demand with limited supply, sellers would want to ensure the seriousness and financial capability of potential buyers. Requiring proof of funds or pre-approval letters adds a layer of security and certainty in this ever changing market. This requirement not only streamlines the process for sellers but also ensures that potential buyers are truly ready to make a purchase, thus reducing wasted time for all parties involved.
In July 2022, average days on the market for homes was 27 days. In July 2023, it is now 57 days (source: San Antonio Board of REALTORS). Although homes are on the market longer now, the requirement to include the pre-approval letter or proof of funds with all offers remains. Homes in some areas of San Antonio move faster than others and we still experience multiple offer situations. Buyers should be talking to their lender regularly throughout the home buying process to make sure they are complying with all lender requirements and supplying them with the documents they need to approve the loan. The sooner this process starts, the better for buyers. Even if homes are staying on the market longer in 2023 compared to 2022, the practice of requiring pre-approval letters or proof of funds remains a testament to its importance in the overall transaction process.
Preparedness for Buyers: Initiating the financing process early on gives buyers an accurate picture of what they can afford, helping them tailor their home search more precisely. It also prepares them for the financial responsibilities and requirements that come with buying a home.
Certainty for Sellers: Regardless of how long homes stay on the market, sellers will always prefer buyers who can demonstrate their ability to finance the purchase. It reduces the risk of deals falling through.
Streamlined Process: For real estate agents and brokers, having buyers come pre-approved means they are working with individuals who are serious and ready. This makes the process more efficient for everyone involved.
Multiple Offer Situations: As mentioned before, some areas still witness multiple offers. In such cases, having a pre-approval can make one offer stand out over another.
Changing Market Conditions: Real estate markets are influenced by numerous factors. While the average days on the market have increased, it doesn't necessarily reflect a drop in demand. It might indicate that buyers are more selective, prices have stabilized, or there's more inventory available. In any of these scenarios, a pre-approval letter remains beneficial, necessary (and still a requirement to be submitted with all offers).
Builds Trust: For both sellers and agents, seeing that a buyer has already gone through a preliminary financial check builds trust. It signals that the buyer is genuinely interested and has taken preliminary steps to ensure a smooth transaction.
In conclusion, even as market dynamics shift, the underlying principles of trust, efficiency, and preparedness in real estate transactions remain constant. The practice of requiring a pre-approval letter or proof of funds aligns with these principles, making it an enduring aspect of the home buying and selling process.