A few weeks ago I shared my "#1 Secret Selling Tip" so I thought I'd follow up with something on the flip side of things - buying! Yes, there are even "secrets" when purchasing a home. Here it is:
So, what is it?
It's basically a quick snapshot of your overall finances - what you make, what you owe, and your credit score. All the nitty-gritty details will be ironed out over the course of the transaction but a lender will usually ask for:
Each lender is different in what they ask for so this may be an incomplete list.
So, why do they need this information?
To see if you can afford your home! The two big numbers will be your debt-to-income ratio and credit score. If you have too much debt or your credit score is terrible they will assume there is a high likelihood of default on the loan so they will not loan you the money!
So, why should you get one?
Here are the two phrases I hear all the time: "I'll wait to find the house first" and "I've got good credit so I'm good". I can offer up numerous horror stories to combat these notions:
1) I was helping a client find the perfect home which took over 4 months to narrow down. They really hesitated getting the financing in order until we were ready to write the offer. Upon further investigation it was discovered that their previous home sale from a few years ago was actually in default at the time of sale and registered as a short sale...huge hit to their credit score and history and they no longer qualified for a loan.
2) A quick pre-approval for a client showed up a lot of unpaid and debts in default. Turns out that their ex-spouse had stolen their identity and racked up a lot of charges. It took almost a year to get all of it straightened out.
3) During the pre-approval and house hunting process a client wanted to get their tax refund early and signed up for a "tax anticipation loan". Problem is, loan = debt and their new debt-to-income ratio was now too high. They had to wait until they received their true tax refund and pay off that loan and meanwhile their dream home sold.
I could keep going. Another big issue is when it comes to submitting an offer on a property. When I represent a home seller I will not even entertain an offer without a pre-approval in place. Why should a seller negotiate with someone who hasn't even taken the very first step in purchasing a home? The good ones go fast - show them that you are ready!
Having this information in place will also give you a good idea of what you're monthly payments will look like. This figure will vary greatly as it is dependent on your down payment, interest rate, property taxes, and homeowners insurance. And speaking of interest rates...a pre-approval can also lock in today's interest rates for a certain amount of time. This is nothing but good for you. If rates go up, your payment goes up! To put this in monetary terms, if the interest rates changes from 4% to 4.25% on a $100,000, 30 year loan, the monthly payment would increase by $14.52. You may not think that's a big deal, but, if you compound that out over the life of the loan, it is an extra $25,715.15! Even worse, if the rate was to increase to 4.5% the increases would be $29.27/month and $53,420.00 total!
So, where should you get one?
I always encourage to stay local with your lender selection. I like the notion that I can meet someone in person who is invested in our community and easily contacted. In my experience I've found that the big, national companies take a longer time to close and have more headaches involved because of their sheer size. No joke, I had transaction where the loan originator was in Tennessee, underwriter was in North Carolina, and the closing department was in Texas. It was awful trying to keep things straight and timely answers on things.
I will also encourage you to shop around a little bit. It will not ding your credit score much to get a few quotes on rates. If you're happy with your current bank, contact their mortgage department. Check out a local credit union as they can often offer different qualifications and programs. Finally, also speak with a mortgage broker as they can "shop you out" to multiple lenders and can provide even more options.
People can debate which came first, the chicken or the egg, but I'm telling you the pre-approval definitely comes first when purchasing a home. Do it, do it now! I rest my case!
Want even more home-buying information? Check out our Buyer's Information page!