Most people begin the home-buying process with weeks or a few months of online searches and going to open houses before speaking to a lender or a real estate agent. On the surface, this makes sense since, with today’s internet, information is readily available for us all. Many sites like Zillow.com and Realtor.com are updated with most of the listings currently on the market. Gone are the days when agents had exclusive access to a goldmine of data. Mortgage rates are also posted online daily. Sign up on a site like Lendingtree.com and sit back and see all the lenders' offers start pouring into your inbox.
That’s just how it is in today’s world. It’s convenient, there’s little or no pressure to commit to anyone or anything, and frankly, it’s something you can easily do on your own. But what happens when you find the house you’ve been looking for? More than likely, nothing will happen because, if you fit the above description of folks and are searching in a highly active housing market such as the DC Metro area, you’re already too late.
If you haven’t hired a Realtor or spoken to a lender, then you’ve got some work to do before you can make an offer on a house:
Find a Realtor (sooner rather than later):
This should be first on your list. Yes, I say this because I myself am a Realtor, but also because it’s true. Even if you are months away from making a home purchase, a good agent can give you critical insight and help prepare you in advance, making the process a whole lot easier later. For example, a Realtor can provide you with information that can only come from first-hand experience and knowledge of communities, something websites cannot do. I for one, make it a point to provide my clients with information about commuting. Sure, you can find bus routes and metro locations online, but I like to share info about “slug-lines” (organized carpooling to DC).
A good Realtor will be able to give you several good recommendations for lenders to speak to. Go ahead and search online but an agent can recommend a few mortgage lenders based on experience and how well they work with clients.
An agent has access the network of local Realtors who may know of homes coming to market before they are listed anywhere. Just as you may not be ready to buy, there are homeowners that aren’t quite ready to sell yet but plan to in the near future. It would be nice to know who they are, right?
Depending on your time-frame, one of the first things a licensed Realtor would have you do is get pre-qualified or pre-approved for a specified mortgage loan amount by a broker or lender, which leads me to the next important item on the list.
Find a Mortgage Lender:
Do your research on this one but don’t forget to ask a trusted Realtor to recommend a few reputable mortgage loan lenders. Your social security number, W-2s or recent pay stubs, and a short discussion over the phone with a mortgage loan originator can get you pre-qualified within as little as an hour after a credit score check.
But wait ......Pre-qualification and pre-approval are not the same:
Eddie Jackson, Producing Manager at Flagstar Bank in Washington, D.C., says that “most buyers and agents at this point know to ask for a pre-approval. However, they are typically more focused on the wording than the actual meaning of the term. Any responsible loan officer is going to review income and assets to some degree. Most loan officers are not formally trained at doing this properly. As a result, the accuracy of their conclusions may vary.”
Home loan pre-qualification and pre-approval involve two different processes and it’s important to understand the differences.Mortgage loan officers typically issue loan pre-qualification letters which show your agent, the seller, and seller’s agent that you are creditworthy and are serious about buying a home. Note, however, that these letters are not approvals. “Despite this,” says Eddie Jackson, “some loan officers can issue "pre-approval" letters. The most reliable pre-approval letter is one which is issued by an underwriter. While it isn't necessary to have one in every transaction, it's particularly important if someone receives over 25% of income from commission, is self-employed, has credit concerns or is pushing the envelope regarding debt to income. Anytime you can get a lender to have an underwriter to review situations similar to those. A failure to do so can always result in a loan that doesn't go well.”
Mortgage loan originators and processors cannot issue pre-approval letters - only a mortgage underwriter can pre-approve you for a home loan. And it’s a good idea to have a valid pre-approval; it is the best tool you can have when looking for a new home. While a pre-qualification may come much faster, normally within a few hours, a valid pre-approval takes much longer time, 30-45 days depending on the type of loan and size of your down-payment, and is underwritten by an authorized underwriter who is the final person that says your loan is approved. Whether you do get it done before or after you find a home, it must be done. But getting upfront pre-approval has great advantages. With a valid pre-approval by an underwriter in hand, all that’s left for you to do is find the home you’re approved to buy, have it appraised, and in most cases, close in just a few days. Had you only been provided with a pre-qualification letter, the stated amount of your loan qualification may change after it has gone through the underwriting process, after a more detailed look at your finances takes place. An underwriter will ask for W2’s, Bank Statements, tax returns, letters of explanation to items on your credit report, etc.
Imagine this scenario:
You’ve been quickly issued a pre-qualification letter for a $500,000 mortgage, you’ve successfully negotiated to buy a home for $480,000 and close the deal in 30 days. The underwriting process begins. You’ve been asked to submit your most recent W2’s, pay stubs, tax returns, statements, letter from your employer, and more. Your tax returns match the W2’s you originally submitted for the pre-qualification letter, however, it now comes to light that you have taken unreimbursed expense deductions that effectively lower the amount of your disposable income. The underwriters see this and, with 2 weeks into the process, determine that you actually cannot afford to buy the home and tell you that you are now approved up to just $450,000 and a certain property value. Perhaps, if you still want the house, you’ll need to increase your down payment. Many deals crash this way. Sure, you may also find yourself in the good position of being approved for much more after the underwriting process, but you would have wished to know that upfront.
The other advantage of first going through underwriting is leverage. Even if you find yourself in a bidding war over a home, you’ll have the advantage of telling the seller that you can go to settlement within a maximum of a few days because your underwriting is out of the way and your deal is a sure thing...now. You’re subsequent negotiations over who pays for closing costs, inspections, and repairs will have a better chance of going your way - Leverage. In essence, the ability to close quickly is a way to get a great deal.
Ask your Realtor for a list of lenders with great reputations and insist that your mortgage broker/lender issues a pre-approval that has been reviewed by an authorized underwriter.
This post is also available on my blog at www.BeltwayLand.net