Taking the First Step on Your Investment in Homeownership
By Jim Perry
A theme you will see repeated often in real estate columns is: for most Americans, their home will be the biggest and best investment they will make in their lifetimes. Factor in all the tax and credit benefits and you will see how homeownership offers opportunities presented by few other investments. However, since few investments offer the enjoyment and excitement of actually shopping for a new home, it is important for home buyers to stay focused on the importance of approaching their purchase as a major investment.
The best starting point for any home buyer is to begin with a solid assessment of what they can afford. Fortunately, today many home builders, mortgage brokers and others provide workshops for homebuyers that typically provide a terrific education for home buyers on the basics.
Once a home buyer has gathered their downpayment and taken steps to repair any credit problems that dampen their credit score, the next major step in a home purchase is to get pre-qualified and/or pre-approved for a mortgage loan. The pre-qualification and pre-approval processes offers buyers and lenders a far more precise picture of the buyer’s finances in order to select the best possible home for the investment and helps home sellers better evaluate offers.
Pre-qualification and pre-approval are similar but different procedures with different purposes:
- Pre-qualification is the initial step in the mortgage process. A mortgage loan pre-qualification is merely an estimate of how much house a buyer can afford and how much money a lender would be willing to loan. It is a simple calculation of income versus current debt along with other financial obligations to establish a target purchase price range to consider. Pre-qualification does not typically entail a detailed analysis of the buyer’s credit report or ability to purchase a home.
This process offers a great opportunity to learn more about the different loan opportunities that are available from the lender, so buyers should take the time to ask questions. While internet mortgage lenders may offer great opportunities and competitive rates and fees, do not discount the value of sitting across the desk from someone to discuss the details of all available options.
- Pre-approval offers a tentative commitment from a specific lender for mortgage funding. It entails a much more thorough analysis of a buyer’s financial picture. Pre-approval requires the buyer to fill out a mortgage application and provide all the necessary documentation for the lender to perform an extensive financial background check and to analyze the buyer’s current credit rating. This allows the lender to determine the specific mortgage amount that will be approved and offer the buyer a better idea of the interest rate they will be paying.
Upon approval, the lender will provide a written conditional commitment for a specific loan amount to help the buyer shop for a home at or below a certain price point. This will help facilitate the sale because it lets the seller know that the buyer is ready to move forward and have the cash commitment to do so. Pre-approvals are not binding for the buyer, which means one can still obtain a mortgage from a different lender.
Pre-approval is not a guarantee a buyer will be approved for a specific mortgage or home purchase. The loan will be contingent upon concluding no significant changes in the buyer’s credit have occurred, as well as confirmation of details of the home being purchased being borne out by independent third parties. The home will need to be appraised to confirm its value and a title search will be needed to verify the new loan can be property insured. When purchasing a resale, lenders will require a home inspection report to verify the physical condition of the home.
Pre-qualification and pre-approvals offer honest assessments of what a home buyer can afford. These steps can save a considerable amount of time and uncertainty by helping homebuyers stay focused and make the most informed decision possible.
The BIA Baldy View Chapter seeks to advance the opportunity to attain the American Dream of home ownership. For additional information on homebuying, home improvements or the benefits of homeownership, go to www.biabuild.com on the web.
And don’t forget to set your clocks to ‘spring forward” tomorrow.