Q We have decided to buy a home. What do we do first, where do we start? – N.T.
A The first thing you should do is find a good loan officer who can analyze your financial situation and let you know how much you can afford to spend for a home.
Many people make the mistake of shopping for a home first and then contacting a mortgage company later to see if they can qualify to buy it.
In fact, until a few years ago, that was the traditional method of home shopping. The real estate agent would ask a few questions about the price range you were interested in, then you would drive around and look at homes in that range. When you found a home you liked, you would write up an offer and then go to the bank and apply for a loan.
The problem was, buyers would sometimes find out that they could not qualify for a large enough loan to buy the home they wanted. The deal would fall apart and the buyers, the real estate agent and the home sellers would have to start all over again. It was a very inefficient system.
Today, most home buyers go to a mortgage lender first to get preapproved for a loan before they even make an offer on a house.
This is not a requirement, but it removes a major hurdle because all the parties involved know that the buyers are financially qualified to close the deal as soon as the purchase offer is made. All that remains to be negotiated is the purchase price, closing date and any repairs that the seller may have to make to the property.
An added advantage of being preapproved for a mortgage is that you can close quicker. It typically takes about 30 days to process and close a purchase loan. When you are preapproved for a mortgage, you complete about half that process before the purchase offer is even made, so you can sometimes close the deal in as little as one or two weeks. That can be a powerful bargaining chip when negotiating with anxious sellers.
So how do you go about getting preapproved?
As I said at the beginning, find a good loan officer. Notice that I didn’t say shop for the lowest interest rate. There are several reasons for this. For one thing, the financial markets are very volatile these days. Mortgage rates can change once or twice in a single day. Any rate quote you get today is worthless tomorrow.
Now, obviously, you want to make sure you are getting a fair interest rate, so call around to a few banks and mortgage companies and find out what the prevailing rate is that day. You will probably find that most legitimate banks and mortgage companies are fairly close in the rates they quote you, so then it becomes more a matter of selecting the person you with whom you feel most comfortable.
You want someone who is knowledgeable and willing to spend some time helping you through the loan process, not someone who just wants to get your signature on the loan papers and then rush you out the door.
When I meet with mortgage clients for the first time, I immediately pull a copy of their credit report. Most mortgage companies have computer access to the credit reporting agencies in their office that enable them to print out a complete credit report in a few minutes.
I review the report with the client to analyze their debt load and see if they have any derogatory credit items within the past two years, such as late payments, collections, judgments or bankruptcies. Older derogatory items are not much of a problem as long as you have re-established a good payment history in the past two years. Lenders are primarily interested in “what have you done for me lately.”
Sometimes borrowers will find collections on their credit report of which they were not even aware. Typically, any outstanding collections or judgments must be paid off prior to closing a mortgage.
Another reason that we analyze credit reports is to look at your total monthly debt load. The less debt you have, the larger the monthly mortgage payment you can handle. With today’s automated underwriting systems, your credit rating plays a very important role in determining how much you can borrow. The old 36 percent debt-to-income ratio that was the rule when all loan application files were underwritten manually has largely been thrown out the window.
I have seen borrowers with excellent credit qualify for a mortgage with monthly payments as high as 65 percent of their monthly gross income. So don’t think you can’t afford that dream home of yours until a loan officer has run your application through automated underwriting.
Once you have completed the loan preapproval process, you will know exactly what price home you can afford, what your monthly payments will be and how much cash you will need to close the deal. Then you are ready to hit the streets with a real estate agent and find the home of your dreams.
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box 930, Everett, WA 98206. Fax questions to Tytler at 425-339-3435, or e-mail him at economy@heraldnet.com
Steve Tytler is a licensed real estate broker and owner of Best Mortgage, Inc. You can visit the Best Mortage Web site at www.bestmortgage.com.
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