One of the reasons that some first time home buyers have so many problems when they buy a home is that they don’t understand the home buying process or the roles of the people who are typically involved. In brief, they just don’t understand how to get the process rolling or how to keep it rolling. Because so much is at stake, this often creates an anxiety level high enough to cause them to spend several years in a series of false starts before they move forward with a home purchase. In the end, they sometimes buy with little care or forethought simply because they want to get the process over with.
The Natural, But Not the Best Place to Start
Start Out by Meeting with a Lender and a Real Estate Agent
Why do I encourage you to start out with a meeting with a loan officer and real estate agent? Briefly, during a one hour meeting with a good loan officer, you should be able to find out what you would be able to borrow under a standard 15 or 30 year fixed rate loan, how much you might be able to extend that with an adjustable or balloon mortgage, how much you could afford if you limit yourself to the monthly payment you’re comfortable with, and how much cash you will need to complete the purchase. If you are short of cash, you will also get an education on the sources available to help you come up with it. There are a wide variety of programs that provide assistance to home buyers who are short of cash for down payment and/or closing costs.
Similarly, in an hour or so with a good real estate agent, you should be able to put together a fairly realistic perspective on the kinds of homes that are available in your price range in a variety of local communities. If you have already met with a loan officer, you should be able to begin to think through some of the trade-offs. That is, whether you may have to maximize the amount you borrow to afford the home you want or whether you may want to think about compromising house size or location to keep your payments within a more comfortable range. In many cases, home buyers can reach a clearer understanding of their options in an afternoon talking with a knowledgeable loan officer and real estate agent than they would in several months on their own.
Getting Started Early with a Lender Conference
- The Colorado purchase contract has a section in which the buyer must specify the type and amount of the loan they are planning to obtain. Because the loan type can affect the seller (e.g., by impacting the amount of time required for closing or the costs that the seller will have to pay), you should have a clear idea of what type of loan you will be seeking before you make an offer.
- In your early discussions with a loan officer, you may find that you need to save some additional cash, to pay off some existing loans or credit cards, or to clear up some credit issues. If you find this out early on, you may be able to get things set right before you lose your dream home.
- There are upper limits on certain loan types depending on where you are buying. With FHA loans, for example, loan limits in Boulder County may exceed those in neighboring Weld or Gilpin counties by $100,000 or so. If you need to use an FHA loan, you need to know not only how much you can afford — but where.
- There can be difficulties in purchasing certain types of properties using certain types of loans. In some condominium or townhome complexes, for example, you may not be able to use an FHA loan. In others, even most conventional loans may not work (see Condominiums and Townhomes).
- Once you’ve met with a loan officer and they’ve run a credit check, they can typically write a “pre-qualification letter” for you. Generally, this letter states that the lender believes that you will be able to qualify for a loan of a specified amount and type — given the information you’ve provided them and a review of your credit history . When you make an offer, having such a letter will make the seller much more comfortable. Indeed, it is sometimes difficult to get a seller to take your offer seriously if you don’t have a pre-qualification letter.
- With most lenders, you can take this one step further and apply for loan approval before you find a home. If you have been approved for the loan — and submit a letter with your offer that lets the seller know this — you look like a cash buyer to the seller. In some cases, this may give you some bargaining leverage. In others, it may allow you to win out over other buyers in competing for a particularly attractive property. In a competitive market (Local Real Estate Stats), having loan approval may very well make the difference between the seller accepting your offer or someone else’s.
- Once you have made an offer and it has been accepted, you enter what is often the busiest period in the home buying process (see Under Contract). You will be completing inspections, checking title work, preparing for closing, and planning your move. This will be much easier if you have most of the loan issues out of the way before you start.
- Having the pre-qualification or loan approval letter not only makes the seller more comfortable when you make an offer, it makes you more comfortable when you’re searching for a home. If you know what you can afford and what your monthly payment will be at a given purchase price, you will be able to think more clearly as you consider your housing options.
Sitting down with a good real estate agent very early in the process is no less important than talking with a lender, but I won’t belabor this issue here. To get a feel for why I recommend meeting with an agent early on, read through my sections about Real Estate Agents, about Our Game Plan for helping you buy a home, and or section about the Risks and Pitfalls involved in the process. Good expertise and assistance is available to you, and generally its available at no cost. Consider using it.