Step 2: The Hardest Part? Obtain Financial Preapproval
In the last post, I jokingly called finding a real estate agent the easiest part of the process- there are lots of us who want to help. Maybe then it’s appropriate to call step 2 the hardest part of the buying process- it’s not that the process of becoming preapproved by a lender for a home purchase is complex, but there’s a lot of work, patience, and saving over time to get there (unless you’re a trust fund baby… and in that case I’m still happy to work with you).
In parallel to the real estate agent helping you navigate the process of finding and closing on a home, the lender helps the client navigate the process of getting funds in place for the purchase and ensuring they’re not biting off more than they can chew this way. Once a client contacts a mortgage lender, the lender will work with them to assess roughly how large of a purchase price the client can obtain a loan for. Once this has been determined by looking at things like income, account balances, debt obligations, and credit, the lender will provide what is called a preapproval letter. This letter is used initially to guide the search process by avoiding places that are not within reach, and later when making an offer this letter is shared with the selling party. If the seller sees that the offer amount is beyond the purchasing power of the buyer specified in the letter, they realize it is risky to accept this offer instead of others who have been qualified for a higher purchase; if the loan cannot be obtained, the buyer will cancel the sale. This will waste time and money for all involved and perhaps cause the seller to lose other would-be buyers.
Timing for preapproval is important- with mortgage rates continually changing, obtaining preapproval with a lender can help a client lock in a rate for a period of time. When rates are expected to rise, this can make a huge difference. Without getting into the nuts and bolts of how financing a home through a mortgage works, I’ll instead focus on how to find a lender. Like real estate agents, there are lots of mortgage lending companies. Like real estate agents, some are more reputable and capable than others.
Perhaps the main choice regarding a lender is whether to go with a smaller, local lender or a big bank. Big national banks like Chase or Wells Fargo provide name recognition and often more trust as they tend to have more standardized practices in place. If a seller sees that a purchase will be financed by some bank they’ve never heard of without much of a reputation, they may be more nervous that a buyer’s preapproval is inaccurate or even shady. They consider that the internally standardized processes of a bigger bank should protect against this. If your purchase is fairly normal (you have W-2s, no glaring credit issues, etc.), a large bank should work just fine and may even have advantageous programs if you bank with them.
Smaller lenders are more inclined to vary their lending practices on a case-by-case basis and might be comfortable providing loans in situations bigger banks would shy away from. The smaller lender might specialize in a certain type of lending situation like helping a person get a construction loan to rehab a home. Their familiarity in this niche gives them greater flexibility and greater awareness of incentive programs their clients can take advantage of to obtain better loans. That being said, specialists within larger banks should have this expertise as well, but there might be more internal processes for them to work through. On the other hand, larger banks may have more around-the-clock support through 800 numbers, etc. A smaller lender will likely feel much more personal since they have less clients, but loan officers within big banks can certainly provide that as well. If your lending requirements are commonplace, the decision for which lender to go with probably doesn’t matter as much. If you’re in a more unique situation, finding a lender who has navigated that sort of territory before will be advantageous. For the rare person that has a pile of money to pay cash for a property, you can skip all this and instead just show your account balance to your agent and be done. Sellers like buyers with cash, too.
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