I’m always amazed at how many people I meet every year who want to start looking for a home before they talk with a lender. Maybe it’s my upbringing, age, or even slight OCD tendencies, but I would never spend time shopping for anything that I didn’t know I could actually buy. I hear all kinds of interesting reasons not to get preapproved…
I have good income… Income is only one piece of the puzzle the lender is evaluating to determine the amount they are comfortable lending, or whether they will lend at all. They are also looking at length of employment, credit score, debt, and disposable income among other things. I have worked with very successful clients who make A LOT of money. Unfortunately, some of those same clients have A LOT of debt and cannot qualify for the financing they assumed they would be able to get. If you are planning a job/career change, you will want to talk with a lender about how or whether that will impact your ability to get a loan. Many lenders require a certain amount of time in a new job before they are comfortable lending.
My credit is good… Again, this is only a piece of the puzzle. When was the last time you checked your credit report and not just your credit score? I have worked with several clients over the years who have excellent credit, but have been surprised by things popping up in their credit report – delinquent accounts they never opened, past due child support payments, tax liens, etc.
Many times, these surprises were just a credit agency reporting error that was easily resolved by providing a full name and social security number. However, it still took time to be updated on the credit report and held up the financing process. It can take at least a month and up to three to six months for some items to fall off your credit report once corrected. A good lender can help you expedite the process, but it will still take time. The new owners of your dream home have already moved in while you’re still working on your credit issue.
I already pay $X amount for rent… This is really common. Clients have assumed that since they have paid $3,000 a month in rent for the last three years without any problem, they should be able to afford a $3,000 monthly mortgage. Makes sense. However, the lender is only going to lend based on a certain percentage of monthly income, which typically maxes out at around 45%. So even if there’s no debt, the maximum loan amount is going to be limited. If there’s debt, then the loan amount is even less. I’ve had many clients get surprised by this one.
I’ll figure that out once I find the right property… Congratulations, you just lost your dream home or missed a really great deal! In just about any market, but especially in the current market, nice homes and good values go quick. If you decide to talk with a lender once you’ve found the place you want to buy, it’s going to take two to three days to get pre-approved if you have everything ready. If you need to get copies of documents or gather additional information, it can take longer. While you’re getting everything together, the competition is already opening escrow.
I have a brother/aunty/cousin/friend who is a lender… Which means…??? I’ve never been able to figure this one out. Unless they are personally lending the money and really LOVE you, this has no bearing on your ability to secure financing or the time it will take. All of the points above still apply no matter who is processing your loan.
The most important first step in the home buying process has always been, and still remains, talking with a lender to understand your budget and what type of financing you will be using. If you have been watching my monthly market updates or paying attention to any news headlines, other than election coverage, you know that the current real estate market is very competitive. This makes it even more important to be preapproved if you’re serious about buying a home!
What is a pre-approval?
The pre-approval is taking that extra step of providing the documentation needed to verify income, assets, and debts. A lender will ask for tax returns from the last two years, bank statements from the last two months, and the last two pay statements as well as approval to pull your credit report. Without this information a lender will not be able to give you a loan amount or a firm commitment to even provide a loan.
Don’t be surprised if your lender asks for a lot more information and documentation than the items I listed above. It is important to understand that lenders have increased requirements and tightened lending standards in the current economic environment. The examples below are just a few examples of some recent changes. Lending requirements are changing frequently as lenders are adjusting to the new realties of our economy.
Employment and Income Verification. Lenders used to verify employment once. Now they verify two or more times before the loan is approved. Some lenders are asking for more than the last couple of pay statements. This is especially true for self-employed or business owner borrowers. In the past, lenders could use the last couple of years of pay history. Now they are using the most recent history if income has decreased due to current economic conditions.
Rental Income Verification. Lenders are now asking borrowers using rental income for qualification to provide additional documentation to verify rental income. A lease/rental agreement used to be sufficient. Some lenders are now requiring proof of rental deposits for the last six months. Some are also asking for employment verification for tenants. Providing this additional information and documentation can take some time.
Lending Standards. Some lending standards have become more stringent in the current economic environment and exceptions that were allowed in the past are no longer available. For example, some lenders might have allowed borrowers with great credit and low debt to use a higher percentage of their monthly income to qualify in the past. These exceptions are no longer available.
What if you’re purchasing with cash?
First of all, congratulations if you are able to purchase without financing! Even though none of the information above applies, it’s important to know that sellers still expect proof of cash funds such as a letter from a bank or account statements before seriously considering a cash offer. I’ve worked with cash buyers who took a couple days to provide documentation and lost great deals because other investors were prepared and could execute the contract immediately.
It’s also important to understand that an all cash purchase will potentially give you an advantage over other buyers but will not get a huge discount that many cash buyers have enjoyed in the past. Savvy sellers understand that a well-qualified financed buyer will also be providing cash once the loan is funded. Even though it may take a week or two longer, and there are still risks such as appraisals, many motivated financed buyers in this competitive market are including appraisal clauses in their offers to level the playing field with cash buyers. Cash buyers must still make competitive offers in this market to win the deal!
If you are serious about purchasing property, BE PREPARED! I can guarantee the other competing buyers are ready!