Information for first time home buyers
Buying a Home? Know Your Borrowing Power
When shopping for a home in the South Bay you can save yourself a lot of time, energy, and disappointments by taking time to find out how much borrowing power you have. With that knowledge you can focus your search on homes you can afford. In addition, if you get lender confirmation of your purchase power you can negotiate with increased leverage and confidence. Thus, a smart move on your part is to determine your financial qualifications for a loan before you even begin to look at homes. How can you do that? Get pre-qualified and/or
pre-approved.
Get pre-qualified
This process will give you a general idea of what you can afford. It is an estimate based on a surface review of your income and debt. You can pre-qualify yourself or you can have either a real estate agent or mortgage lender handle this for you. If you choose to pre-qualify yourself, you can use one of the many online mortgage calculators designed for this purpose.
Most mortgage lenders have these calculators available on their web site.
When lenders pre-qualify you they ask questions about your income, total debt, monthly payment obligations, current employment, payment history, and any negative factors such as bankruptcies. Generally, they do not perform an analysis of your credit report. They rely on you to provide accurate financial information. There is typically no cost for a pre-qualification analysis nor is there a commitment by either you or the lender with respect to a future loan.
Get pre-approved.
The pre-approval process is more detailed and thorough than pre-qualification. You will be asked to complete a mortgage application, and some lenders charge an application fee. The lender verifies all of the information on your application and reviews your credit report. If you qualify, you will receive a written commitment – a pre-approval letter – for a loan up to a specified amount subject to certain terms and conditions. This commitment is still not a guarantee that your loan will be approved when you do settle on a home to purchase. Your loan commitment is finalized after information about the property, including an appraisal, is submitted and approved.
Even though pre-approval is not a loan commitment, it offers a number of advantages during the home buying process. You know the maximum amount you can spend so you don’t waste time looking at homes that are beyond your price range. You are also more attractive to sellers because you already have financing squared away. This is really to your benefit in a sellers’ market in which the home of your dreams might have multiple competing offers. In any market, pre-approval strengthens your negotiating position because you come to the table with the money to back your offer.
Pre-approval can be particularly helpful for first-time buyers as well as self- employedpersons or those paid on commission. If you are a first-time buyer in competitionwith similar buyers who have already demonstrated their ability to meet a monthly mortgage payment, you may find your offer in a weaker position in the eyes of a seller. Sellers may also have doubts about your ability to get financing. Self-employed buyers or those working on commission sometimes do not have the financial documentation or “paper trail” of salaried persons. Some sellers see this as a red flag. A pre-approval letter in either of these circumstances helps because it demonstrates that a lender has already considered your financial situation and is ready to proceed with the loan.
Regardless of the approach you take, ask your mortgage lender to clearly explain what is involved in each process and any fees, commitments, terms, and conditions that apply. Then let the search for your ideal home begin.
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