The first step in the home buying process is to establish what you can afford to pay. It is far less taxxing to complete an application and gather paperwork for a lender than it is to search pointlessly for the wrong property.
Without proper preparation, many buyers waste time looking at properties beyond their means. They get lulled into the mistaken notion that they will be approved for a loan simply because an online mortgage calculator displays a number they are comfortable paying each month. There is a common misperception pertaining to lender pre-qualification as well. The misperception has also lulled buyers into thinking they will be approved for a loan. The pre-qualification process is not an in-depth look at your ability to purchase a property.
If you need a loan to purchase a property, you need to be pre-approved by a lender. The pre-approval process is much more involved than the pre-qualification process. You will complete an official mortgage application and supply the lender with the necessary documentation to perform an extensive check on your financial background and current credit rating. From this, the lender can tell you the specific mortgage amount for which you are approved. You will also have a better idea of the interest rate you will be charged on the loan and, in some cases, you might be able to lock in a specific rate. You might even discover you qualify for a loan affording you more buying power than you originally thought.
With pre-approval, you will receive a conditional commitment in writing for an exact loan amount, allowing you to look for a home at or below that price level. The conditional commitment is also known as a pre-approval letter. In a competitive market, the pre-approval letter (and proof of funds for your down payment) will let the seller and the seller's real estate agent know your offer is serious - and could prevent you from losing the home to another potential buyer who already has financing arranged.
Although the pre-approval is one step further in the loan approval process, it is not the final step. Additional steps occur during the escrow process. Therefore, once you are pre-approved for a loan, you will want to avoid changes to your finances without speaking to your lender first. You do not want to risk losing your financing or good-faith deposit.
Prior to commencement of our property search, I will need to review the pre-approval letter and your proof of funds for the down payment. If you are an "all cash" buyer, it is equally as important that I review your proof of funds. I will address any questions or concerns I might have with you and/or your lender. This is routine and best practice for everyone involved.
It is extremely important that we discuss any special conditions that might apply to your specific situation as well. The information will help me protect your interests and enable me to best advise you on how we should structure your purchase offer. For example:
You currently own a property. You must sell that property to purchase a new property. The California Association of Realtors has designated a form for use in this situation. We must submit that form with your purchase offer. If agreed to, the form would become a contingency agreement between you and the seller. The form would allow you a specific period of time to find a buyer, enter escrow and close escrow on your current property.
If you have any questions, or need the name of a few tried and true, reliable lenders, please do not hesitate to reach-out.