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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