This situation has crossed my desk more than once, and it seems to be happening more and more. Those interested in buying a home start house hunting before they get pre-approved for their financing. If you noticed, I did not include the term “pre-qualification”. To me, a pre-qualification means absolutely nothing. More on that distinction later in today’s article.
There are a whole host of reasons why a prospective home buyer needs to follow the proper steps. To me, the most important, most critical, and the one with the most lasting impact, is knowing how much you can afford. Just imagine deciding to start looking at buying a place without first finding out how much of a place you could buy. Let’s say you are looking to buy a condo for $400,000. You do your research and start looking on the web at all the available inventory in that price range. You actually might find a place you like and decide to find a real estate agent to write up your offer. A good agent will always tell you to go get your financing worked out before ever putting in an offer. So you take their advice apply with a local mortgage professional.
To your surprise, despite having great credit, good income, and enough for your down payment, that new truck you leased last year has now resulted in you only being able to afford a $300,000 condo.
Have you seen the difference between a $300,000 and a $400,000 condo? No matter what you may find, you have guaranteed you will never be happy with having to settle for a less expensive place. The sad thing is this situation could have be completely avoided. If you knew from the beginning what your buying power was, you would have never given yourself false expectations.
Here’s the right road map to guard against what is supposed to be a happy experience turning into a nightmare.
Get Pre-Approved, not Pre-Qualified, before you every start your home search.
A pre-qualification is you telling your mortgage professional what your income is and how much money you have towards the transaction. Your mortgage person will pull your credit from a minimum of 1 of the 3 credit repositories. They will use that income against your debts on the credit report to determine how much financing you could be approved for. The problem with this entire type of process, is relying on the borrower, to determine their income. Many making their living in the mortgage industry today can’t correctly determine their borrower’s income, even with all their income documentation in front of them. I have no faith that a consumer could ever give me a number that is truly accurate. Did you know that most real estate agents representing the seller will no longer accept a pre-qualification letter when reviewing offers? Their valid complaint for years has been that so many people who presented a pre-qualification letter ended up not being able to complete the purchase. A pre-qualification letter is nothing more than a letter that states you may be qualified for the loan amount listed.
A pre-approval letter is totally different. We start by obtaining your actual income documentation. When we pull your credit report, we pull a complete report from all 3 credit repositories. We do a detailed examination of your income, assets, and debts. We also run your file through either the Fannie Mae or Freddie Mac automated underwriting system. An approval through these systems is the basis an underwriter uses when reviewing your loan when it comes in. In almost all cases, if the pre-approval process was done correctly, you will have no issues buying the home you are placing an offer on.
So how do transactions fall apart? That’s a topic for a future newsletter.
Do the right thing by going through the process properly. Don’t start shopping until you know, not only how much you can spend, but how much your monthly payments are going to be. It’s no different that visiting the BMW dealership and coming home with a Honda.