Congratulations on deciding that you would like to enter the world of home ownership! One of the very first steps to do now is to determine what your purchasing power is. Maybe you have an idea already, but before the property and home tours begin, it’s best to confirm how much money you can borrow from the bank and how much you can afford.
We always say to start the pre-approval process with your existing lender relationships. During the pre-approval process, your lender will check your credit and employment history and review any other pertinent financial information to give you a concrete number that will help inform the price parameters of your home search.
Some of the items you may be asked to complete or bring in order for your lender to pre-approve you are the following:
- Loan Application (which you’ll receive after a lender has pre-qualified you)
- Authorization to Obtain Credit
- Federal tax returns
- Current pay stubs
- Current bank and brokerage statements (including retirement accounts)
Once you are pre-approved by your existing lender, make sure that they walk you through all the loan programs that might be available to you. Ask them about pre-payment penalties, loan fees, and any other special requirements for that particular loan program. It’s always best to have a ballpark idea of how much your loan will cost prior to home shopping.
Another thing to remember is that your home search may take 6 months, 1 year or longer. The interest rate or loan program that you were quoted during your pre-approval process may not be available by the time you get in contract on a home (market conditions constantly fluctuate), but at least you’ll have a baseline to compare it to you.
Once you are pre-approved by your existing lender, we advise you to investigate what other local lenders may be able to provide you. It’s entirely up to you to decide whom you will originate your loan with, but there are a few things to keep in mind and ask your lender during the pre-approval process.
-Does the lender or mortgage broker do loans in your local market? If so, when was the last one they closed and how quickly can they order an appraisal, etc.?
Ex: Maybe you have a few accounts with a brokerage firm that also generates loans. You speak to them and are pre-qualified for a loan with them, but then you realize that their appraisal timeline requires 21 days and other buyers you are competing with in the SF housing market are working with lenders that only require 14 days for their appraisal timeline. You can still choose to work with this financial institution, but the terms of your offer (physical inspection, financing and appraisal contingencies) are just as important as offer price.
-Some financial institutions are very much relationship orientated. Do your research now about which financial institution you want to forge a relationship with for your real estate buying needs, because 10 years down the line if you decide to add to your portfolio, the lender you have a long term relationship may be able to offer you a better loan program (or jump through hoops behind the scenes to push your loan through faster then normal, thereby making you potentially more competitive then another buyer).
The bottom line is purchasing a home may be your biggest purchase ever and ensuring you’ve done your lender due diligence prior to touring homes and writing offers is the best way to prepare your self for a competitive marketplace.
It’s wise to shop around locally and see what varying banks can do for you.