To Buy or Not to Buy?
In spite of what we may have been lead to believe, home ownership is not for everyone. There is certainly something nice about calling the landlord when the sink leaks and not having to worry if a tree blows down during a storm. But there are many advantages to home ownership as well, and since buying a home is typically one, if not the single largest purchase you will ever make, it is important to consider the pros and cons and weigh your decision carefully. One of the first things you will have to determine is if you can afford to purchase a home, and if you can, how much can you spend?
Keep in mind, however, that just because you can handle the monthly payment, does not mean you will be approved for a loan. There are many other factors which will play into the lender’s decision before they are ready to make a mortgage commitment. Unless you are paying cash, you will need to talk to a lender.
Some people want to see what is available first, and if they find something they really like, they will then talk to a lender. That approach is not a good way to start. In fact, many agents will not even take you to see a home unless you are pre-qualified or pre-approved.
Before I go into the reasons for this, let’s take a minute to understand what it means to be pre-qualified or pre-approved.
Pre-qualification vs Pre-approval
Pre-qualification means that:
- the borrower has applied for a loan
- a credit report has been run and
- based on information supplied, the borrower is qualified to buy a home at a predetermined maximum price.
Pre-qualification is a fairly easy process that only takes about 15 minutes and can often be done at the lender’s office, over the phone or on-line. Upon completion, you are given a pre-qualification letter, often referred to as a prequal letter and you become a qualified buyer!
Pre-approval means that:
- the borrower has completed a loan application
- credit scores are pulled and sufficient
- employment has been verified
- the borrower has submitted supporting documentation such as tax returns and bank statements and
- the borrower is pre-approved to buy a home at a predetermined maximum price, pending an appraisal and title policy.
Clearly, pre-approval is a more in depth look at one’s financial picture and therefore carries more weight. It is important to note, however, that neither pre-qualification nor pre-approval or are a guarantee that you will get a loan commitment. The process for a loan commitment is even more involved and will be discuss in a later section.
Once you are pre-qualified or pre-approved your lender will provide you with letter, which you will give to your realtor and begin your search.
But can’t I just look first?
Looking for a home without being a qualified buyer is like going to a restaurant when you are starving, but not eating. It’s not fair to anyone. First of all, sellers trust agents to bring people into their home who are serious buyers and able to purchase. They don’t want to open their home, especially if they are still living there, to people who are ‘just looking’ or curious. As a buyer, it’s not a good idea to set yourself up for disappointment by looking at homes you cannot afford. When you finally look in your price range, you will have a harder time finding something you like. Everything will pale in the light of the homes you can’t afford. You are also wasting valuable time, while you are looking at homes you will never be able to buy, others are looking and making offers on what could have potentially been your home. Your Real Estate agent’s time is also valuable. Agents work on commission; they only get paid if you buy a home. When working with serious, qualified buyers most agents will bend over backwards to help you find a home, but if you are ‘just looking’ they may not be a eager to give of their time. As one agent once told me, “If someone takes my money, I may not be happy, but I can get more, if they take my time, they have taken something I can never get back.” Finally, when you do find something and want to make an offer, your agent will need to submit documentation that with the offer paperwork showing that you can afford to purchased the home at the price you have offered. Poof of Funds (if you are paying cash) a pre-qualification or pre-approval letter is suitable documentation. Without that, your offer will not even be considered. What you don’t want to happen is to have your dream home sold out from under you because someone got their offer in while you were scurrying around to get pre-qualified. Being prepared, knowing our budget and having a realtor to assist you will set the stage for a positive home buying experience.