The Importance Of A Pre-Approval
I bought a car for the first time about a year ago. We obviously knew about the twins at that point, and while I loved my Altima and it was a straight-up tank of a vehicle (seriously, if you’re looking to buy an affordable sedan with tons of room, look in to an Altima) I knew that we were going to need a lot more space for two car seats, a double stroller, and the one or two times a year that I actually get to play some golf. So, I naturally go online and search “best 2018 SUVs”. As you probably expect, the first seven links are paid ads from car manufacturers talking about why their SUV is rated #1 in this particular category and beats all the competition in the other areas. After some extensive research, we set our sites on a particular vehicle and decided to go test drive it. Felt like a spaceship. My Altima was a 2010 and our CRV is a 2012, so it had been a minute since we had driven anything brand new. It had all of the bells and whistles to it; the full package. We went back to the office and got the full-on sales pitch from the car salesman that everyone knows about. Warranties, life of the loan, different packages that come along with the car for a measly $25 a month.
Unfortunately, the price and monthly payment just didn’t work out. Even with a great credit score, they remained pretty inflexible and frustrating. And I still almost bit, because we loved the car and knew that it would meet the needs that our new family was about to bring on. I called my dad (you already know this, but ALL DADS BRAG ABOUT HOW GOOD THEY ARE AT BUYING A CAR. It’s basically a complex that I’m positive I will take on by the time our boys need to buy cars. (It’s ok to laugh while reading this, dad. It’s a joke.)) and went over the numbers with him and he, thankfully, helped me to realize that I would be putting myself in a financial bind over the next few years while I was paying it off. Not something you want to do before you have two kids added to your lives. Lo and behold, we moved on to something else that does just as well for us and saved over $100 a month. Same class of vehicle, same year, basically the same amenities other than seat warmers and a self-lifting tailgate; first world probs. And thank goodness we did move on, because babies come with enough expenses themselves. With some extra research, and being more honest with myself about my financial situation instead of sweeping it under the rug until crunch time, we set ourselves up in a better spot for the near future.
No, I have not decided to become a car salesman and this is my wordy announcement in doing so. What I want to paint a picture of is how this correlates to the home buying process. When I have a meeting with someone about buying a home, there are a lot of common questions that any realtor would ask. How many bedrooms do you want? Do you want the master on the main floor? How many bathrooms? Want a garage? But the touchy subject is always asking about the financing of the home. If you’re going to pay cash for your next home, good for you and you can move on from having to read anything that I put out. But if you’re not in that position, financing is THE MOST IMPORTANT PART of a home search and probing questions from your agent. You could be driving down 8th Avenue downtown and see a townhouse that you think is perfect for you and fits all of your needs. You go online and see that it’s $500,000. Well, from a perspective of not really knowing about the process, you don’t really know how that correlates to a monthly payment or anything along the lines of financing. You want your agent to take you over there anyway because you love it and have to have it. Afterward, your agent gives you a contact for a lender to get a pre-approval to turn in with your offer. Come to find out, you can only afford a $300,000 loan, and that’s with an FHA loan financing 96.5% of the purchase price. Sorta like finding out that your dream car is out of realistic reach, right? Total and complete bummer. It might even turn you off from even wanting to buy a home right now, and then you sign another 12 month lease that costs you over $1,000 a month in money that you’re flushing down the toilet. All of this could have been prevented if your agent (and I need to do a better job of doing this on the front end) recommends you get a pre-approval done prior to stepping foot in a single listing. Here’s why that’s imperative, for both your sake as well as your agent.
The great thing is, pre-approvals are free to get. At least they are from every lender that I know. If a lender wants you to pay up front for a credit check and all that, move on to a different one. Find someone that is willing to not make you pay for that on the front end. A pre-approval consists of what I used to call “the big six”, which is: Name, Social Security Number, Address, Loan Amount, Estimated Property Value (sales price), and Income. With these items, a mortgage professional is able to pull a copy of your credit report to where they can see what you’re able to qualify for. Not only that, but they’re able to give advice on if it would be financially smart to buy above or below what you’re currently considering in your home search. Just as the housing market and keeping a pulse on everything real estate is my job and passion, the mortgage side of the buying process is theirs. They want to help put you in the best position possible, because that gives them a higher probability of you refinancing with them or using them to help finance your next purchase. No one is trying to sell you snake oil or pull something over your head. Once everything checks out on the front end with your lender, they are able to produce a pre-approval letter than basically states that you’ve done the work on the front end to make sure that you can afford the home that you’re putting in an offer on. This is super important to listing agents, and if you’re in a multiple offer situation, you don’t want to be the offer than doesn’t come with a pre-approval. Just like when you buy a car, you want to have all the possible knowledge that you can to make the most out of the situation. Whether you’re buying a home, car, boat, furniture; you want to leave feeling like you’ve gotten the upper hand. Don’t lose a multiple offer situation with a competent offer just because you didn’t do the work beforehand with a lender.
Say that your pre-approval process takes a turn for the worse and there are some things on there that prevent you from buying a home currently. Thankfully, since you’re using someone that your agent trusts, a credit expert has now seen your profile and is able to give sound advice on what to do next to improve your situation. Maybe there is a collection on there from an old medical bill or service that wasn’t fully paid. Or a student loan that hasn’t been refinanced down to a lower payment in a few years. That mortgage professional is able to manipulate possible solutions to fix your credit score and to set you up for success long term. Sometimes they are quick fixes, like paying off a card that has high monthly minimum payments, and maybe your credit was pulled in between payment periods and shows up as a high payment. Other times, it could be a student loan that needs to get refi’d, or a car payment that has six months left on the payment but you don’t have the money today to finish paying it off. At least now you know that in six months your credit report will be rid of that debt and you can utilize that payment amount being removed in your home purchasing budget.
I get that this might sound like a foreign language and seem as if it’s an avalanche of information, but the point is that you can’t fix a problem without knowing that it’s a problem. If you’re trying to lose weight through diet and exercise, but just guess on what you’re eating all throughout the day or don’t sensibly track your workouts and what you’re eating, you’re never going to get to the point of growth that you’re looking for. You have to see the problem to know there is one, and you have to work toward the solution. Best case scenario, you are pre-approved for whatever you would like to buy, but even if it doesn’t go exactly how you want it to right now, you can put the right foot forward to eventually realizing your goals.