Path to Home Ownership: Financing

Pre-approval : Separating the Home Buyer from the Nosey Neighbor

By now you know your credit history, you have steady employment and you have paid every single bill on time for at least the past two years. You have an emergency savings and, thanks to your budget, you have also saved a small down payment for a house, plus some closing costs if you’re serious. Goal setting and taking action have separated you from the ‘nosey neighbor’ that wants to look at other people’s houses and you, the future home owner.

By this point you should already know how much home you can afford, again thanks to budgeting. When you apply for a loan and the lender says, ‘Congratulations!! You’re approved for $250K!!” You’ll say thanks, but this $150K house is all I need. Can I get a pre-approval letter for that amount so I can make an offer?

We’ll come back to that in a little.

What is the difference between pre-qualification and pre-approval?

• Pre-Qualification.
  This is technically the step before pre-approval. I recommend you talk to a lender and get pre-qualified right now just to start building a relationship. Have a conversation to find out where you are at and how to get to where you need to be. This process does not involve a credit check. The lender is relying on your word alone and making a judgement based on the information you provide. Be honest with your lender because this is your chance to find out what could prevent you from getting a loan or affect your borrowing costs, and how to fix it.
• Pre-Approval.
  This is what separates the ‘nosey neighbors’ from the serious buyers. A Pre-Approval gets you in the door, sometimes literally!! During a hot market where seller’s have the upper hand they can restrict showings to only pre-approved buyers to eliminate the looky-loos. A pre-approval will also make your purchase offer stronger because it tells the seller the deal won’t fall apart due to financing.
  A pre-approval requires a credit check. The lender will assess your credit history, work history, earnings, debt, etc., and make a determination about what they think you will likely be able to repay. It is a lot like having cash for an offer because the lender has already agreed to lend up to a certain amount to buy a house. The money is available, now you just need to go out and find the house.
  
  This why you get pre-approved before you start looking at houses.

Two Steps Forward, One Step Back

Once you have talked to a lender you will have a better indication of where you stand on the road map to home ownership. Maybe you need to save a little more money to get into the house you really want. You might not be able to save a 20% down payment, but if you can do the math you’ll feel more confident you can save what you need.

Maybe it’s time to look for a better job or ask for a raise. You might laugh but if you don’t think it’s possible to earn more money maybe you shouldn’t buy a house. Take ownership in your success and make it happen. I think Ramit Sethi’s book I Will Teach You to Be Rich has some of the best advice on how to approach a raise or promotion. I’ve used it personally to get a promotion and a raise in the past.

Whatever obstacle pops up at this point you should be be able to overcome it, especially now that you have identified the obstacle. This blog post is not going to prepare you for every obstacle you will encounter. It’s your life and only you can live it. Take ownership in your life if you want to take ownership in anything else.

Tap Into Your Real Wealth

Finally, you have heard relationships mentioned several times when it comes to your Buyer’s Agent, Lender and other people on the team you have assembled to help you buy a home. Ask mom and dad to lend you the money for the down payment!! Okay, I’m laughing now!!

In all seriousness, don’t forget about the every day relationships you have with friends and family, especially those who own a home. You can always tap into their experience and ask for their advice. At best they make excellent recommendations and at minimum they can hep you ask better questions. Nobody goes it alone, so surround yourself with people who are going where you want to go.