Hot housing market makes loan 'preapproval' more vital

Savvy buyers in today's tightening housing market get "prequalified" for a loan, rather than just "prequalification."

Q. We are looking for our first home to buy. Our question is, Is there a difference between getting "prequalified" for a mortgage and getting "preapproved" for one?

A. Yes. Obtaining a formal loan preapproval 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 home sales and prices are reaching record highs. Sales have jumped in nearly every part of the nation, and the number of homes for sale has dropped sharply, shifting negotiating power away from buyers and into the hands of sellers.

Real estate agents in housing markets across the country are reporting that sellers are once again receiving multiple offers on the properties they have for sale - and that sellers are more likely to accept an offer from buyers who have been preapproved for a mortgage than those who have merely been prequalified for one.

Here's the difference: A loan prequalification simply is 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 that the buyer will be able to actually 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 preapproval would require that you complete a formal loan application, provide recent tax returns and related documents, and (sometimes) pay a modest upfront fee 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 preapproval process will give you a much more accurate estimate of how much you can realistically borrow based on your income, debts, credit score and other factors. As a result, you won't waste time looking at properties that 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.

Real estate trivia: A new report says that the oceanside enclave of Malibu, California (pop. 12,856), has become the most expensive housing market in the U.S. The average price for a home or condo there is $5.04 million.

Q. Is there a difference between a credit report and a credit score?

A. Yes. A credit report lists all of your creditors, how much you owe, how much credit you currently have available to make additional purchases and the like. It also shows your payment history on the accounts, the names of companies that recently reviewed your report, and why they looked at it.

A credit score, on the other hand, is a three-digit number that helps potential creditors determine your overall creditworthiness based on your payment history and other factors. Scores range from 300 (really bad) to 850 (sterling).

The typical American boasts an average score of 695, according to Fair Isaac Corporation, the company that developed the widely used FICO credit-scoring system.

Q. My father is 92 and is finally moving from his longtime house to a retirement home. I am his only heir. For tax purposes, would it be better for him to deed the house to me while he is still alive, or for me to inherit the property from him after he passes away?

A. It's almost always better to inherit property than to receive it as a gift before the owner dies.

To illustrate, let's say that your dad purchased the house many years ago for $30,000 and that it's now worth $250,000. If he deeded it to you now and you immediately sold it for a net profit of $220,000, you'd owe tens of thousands of dollars in federal taxes on the sale proceeds.

Conversely, if you inherited the home from him instead, the value of the property would automatically be "stepped up" to reflect its value on the day he passed away. If the property was worth $250,000 on the day of his death and you sold it for that amount, Internal Revenue Service rules say that you'd owe no federal taxes at all.

Talk to an accountant or other tax professional for more details. It also might make sense for your dad to form an inexpensive living trust and use it to hold title to his home and other property.

After he dies, the trust could enable the house and his other assets to quickly be passed to you without having to go through costly and time-consuming probate court.

• For the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 4405, Culver City, CA 90231-4405. Net proceeds will be sent to the American Red Cross.

© 2017, Cowles Syndicate Inc.