Tips for buyers – Pre-approval
Home buyers, especially first-time-buyers, often get excited as they look at potential new homes on the Internet. They plug in their criteria, such as 4+ bedrooms, 2+ bathrooms, 1+ acre of property in such-a-such a town and they receive every home that might be a fit. Then they are off to look through the photos and to fall in love with something they see. Clicking on the “please send me information” and putting in their name and number, they sit back, waiting to be contacted with an appointment time, sure this is THE one!
And yes, that house might be the one but before trying to see it, it is important to first get pre-approved for a mortgage. Here is why…
You should only be looking at those houses within your price range. If you enter information in an online tool and you are told you can purchase a $500K home, proceed with caution. In our area, some homes have high annual property tax bills. I have noticed those online tools usually use a % of the sale price as a placeholder for taxes which can result in an estimate that is totally off base. Let’s say you are buying a $300K home and the tool uses 2.5% as a placeholder for taxes, which is about $7,500 per year. In this area, taxes for a $300K home would be somewhere around $11-12K, which would definitely change the amount of home you may be able to afford. So getting an official pre-approval is a “must” when trying to determine what homes you should be viewing.
Also, talking with a mortgage professional before you start your search could be useful to make sure you understand what you can or can’t use as funding. There may be funds or income you think you can use in purchasing a home that are not allowable by a certain mortgage. Or perhaps there is a limit on the amount of gift funding you can use. You also might be unaware that the person giving you money has to show proof of their funding source. I have run into situations in the past where the person gifting money to the buyer did not want to provide any information from their bank. If you can’t use income or gift funds that you thought you could use, your pre-approval amount will change. So there are rules you should be aware of up front.
You also may only be able to get certain loans based upon your down payment amount, credit scores, or other reasons. For example, perhaps you will only be pre-approved for an FHA or VA loan. These are perfectly great ways to buy a new home, but knowing this is what you are using ahead of time is necessary. Why? Because if you are out looking at homes that have peeling paint, mold, plumbing or electrical issues, these mortgages may not be possible until those problems are fixed. Also, if you are pre-approved for a USDA loan, they are only usable in certain geographic areas. If you can only use this type of loan, that will mean certain locations may be out of bounds for your home search.
You also need to know ahead of time if you will be requiring a seller’s concession, which basically lets you mortgage some closing costs. The concession is funded from the seller’s agreed upon sales price. Some mortgage products don’t allow concessions, some do, and some have limits on how much you can ask for. If you find a fantastic home that is at the top of your price range and it’s priced perfectly for the market, you are going to want to make a strong offer. If you need a concession, it reduces the amount that the seller will “net” which reduces the strength of your offer. If you do need a seller concession as part of your deal, you may need to be looking at homes in a different price range.
Another reason a pre-approval is necessary before you actually start looking at homes is because if it’s a hot market and you find a home you love, an offer will need to be placed immediately. Often, offers cannot be submitted unless they are accompanied by a pre-approval letter. Sellers won’t want to take their home off the market when they’re not sure the buyer can afford the house. So you have to be ready to get that offer in asap. Waiting until the pre-approval letter is ready could mean you miss out on the home of your dreams.
Falling in Love
Falling in love is a wonderful thing, but falling in love with a home you can’t afford hurts. If you are looking in the wrong price range, that’s exactly what will happen. You’ll view a home with that fantastic and perfect kitchen and property. You’ll call a mortgage lender and find out that the amount you thought you could spend is not enough for this house. And nothing you find in your new price range will ever be as good! Heartache is no fun.
When your broker asks if you are pre-approved, it’s because they want to help you have a great experience. They want to make sure you are looking at homes you can buy, so when you’re ready, the process will be smooth, your finances will be in order, and you will be able to walk away from the closing with those keys in your hand.
If you need help in the Orange and Rockland County areas, feel free to give me a call at 914-419-0270 or send me an email at firstname.lastname@example.org. I can refer you to great mortgage professionals so you can get started.