Recently I received a request to show a home to a new client. She was referred to me from a past client of mine. She had been looking online at homes for quite some time and saw one she loved and wanted to see the inside and submit an offer. The very first thing I asked was if she was pre approved and who her lender was. This buyer was not pre approved. She said she knew what price range she could afford from doing an online mortgage calculator. I explained that I could show her the house, but that she needed to talk to a lender immediately and get pre approved first. I gave her a referral of a lender that I trusted . She contacted him and applied online. Three days later I showed her the house and we submitted an offer.
Moral of the Story:
You have to be pre approved prior to looking at houses. I do not think any good realtor would show a buyer a home until they were pre approved.
I have pre approval discussions with clients all of the time so I thought it was time to put some information into one place so buyers understand why. If you have any questions just comment below and I will reply!
Potentially Sets the Buyer up for Disappointment
What if the relator showed the buyer a house that ended up being way out of their price range? Now that buyer is going to compare every other home that they view, that is in their price range, to the first one the realtor showed them that was out of their price range.
Find Issues or Mistakes with Your Credit Report
Getting pre approved means that your lender looks at your credit history. What if something shows up that is inaccurate? Or what if something shows up that you had no idea about? For example, I had a client learn in the pre approval process that their ex spouse did not pay the mortgage as ordered in the divorce. The wife’s credit report showed it as a default on her and she was not able to obtain a loan. She had no idea!!! I have also had clients find issues of identity theft in their report. It is better to get all of these issues resolved prior to finding a home. Not only will it save the buyer time it will also save the buyer money. There is no point in paying for an inspection, or possibly appraisal, on a house that you cannot buy.
This one is pretty obvious but it is very important that the realtor knows the amount the buyer is approved for. A buyer should not be looking at houses that are $400,000 when they are only approved for up to $350,000. Also, very important to note just because the buyer is pre approved for $400,000 does not mean the buyer should spend that much. The lender can tell the buyer how much their payment would be at different price points. A buyer needs to be in a position where they can budget for the new expenses that come with homeownership. A buyer also needs to be make sure that can still afford to do the things they enjoy. There is no sense in buying a home that you cannot afford to furnish or replace a water heater if it goes out.
Type of Loan
The type of loan that the buyer qualifies for or chooses to use, will play an important part of being able to purchase a home. Some homes will not qualify for an FHA home loan. Some homes are cash only. What if the buyer is eligible for a conventional loan but they can keep more cash on hand if they go FHA? The only way the buyer will know this is if they are preapproved. This will also make a big difference in how the realtor writes you offer which I talk about in closing costs portion below.
Down Payment Amount
Differnet loan types require different down payment amounts. Is the buyer going conventional with 20% down? Is the buyer going FHA with a down payment assistance program? How much cash total does the buyer have to go towards the entire home purchase? There are also closing costs that need to be paid in cash that the buyer needs to consider. Say for example you have a house you like that is $300,000. 20% down is $60,000. Then closing costs can be around 3% of purchase price so that could be $9,000. So you would need $69,000 cash to use a conventional loan. But if you go FHA you would only need 3% downpayment which would be $9,000. Then closing costs could be around 3% of purchase price which is also $9,000. So you are looking at $18,000 cash to close. Same house, same price. But a big difference in cash you will need to close. Remember, sellers cannot assist buyers with down payment. Sellers can however assist with closing costs. See closing costs section.
Typically closing costs are around 3% of a purchase price. This can vary, that is why a buyer needs to talk to a lender to find out how much they are. A buyer can ask the seller to contribute money towards closing costs. This is called a seller concession. So lets take a look at how that would work using a the above example. Lets say the house is $300,000 and you have to pay $9,000 in closing costs. You have decided to offer full price. When you submit your offer you could do this two ways.
- You can offer purchase price of $300,000 with seller paying nothing towards closing costs.
- Or you can offer purchase price of $309,000 with the seller paying $9,000 towards closing costs.
Both scenarios net the seller full price, $300,0000. So why would you want the seller to pay all of the closing costs. It can be helpful for a buyer to keep as much cash as they can. Maybe they want to buy furniture for the new home. Maybe they want to replace the carpet. Maybe they want to paint their new home. Rolling the closing costs into the purchase price can be very helpful! The lender can tell the buyer how much that will increase their monthly payment. It may only increase your mortgage $20 extra every month to go from $300,000 to $309,000.
A good realtor will talk to your lender about closing timeline prior to submitting an offer. Some loans can close in 20 days. Other loans need 45 days to close. This is important when it comes to presenting the offer. If the house is vacant the sellers may desire a quick close, and 20 days would be ideal. Now lets say that the house is owner occupied and they prefer a longer close like 45 days so they can start looking for their new home and move everything out. Those owners would not care if your lender cuddle close in 20 days. Buyers also do not want to put 20 days into the offer, only to find out later that the lender needs another 10 days to close the loan. The seller may only agree to an extension if the buyer pays additional costs and fees.
There are many reasons why buyers need to be pre approved before viewing homes & submitting offers. Hopefully this post will help buyers understand why pre approval is important.The purpose of my blog is to provide my clients with useful information. I firmly believe the more that I can inform my clients the better!