Many times in the real estate industry, mainly with first time home buyers, the question is “Where do I start?”
Real estate buyers need to realize that the most important step they need to take before contacting a Realtor® to set up a search, and clearly before looking at properties, is speaking with a lender. The lender can be your personal banker or a mortgage banker or mortgage broker.
Banks usually just lend their own money and service the loan throughout the life of the loan. They make their money off the interest that you pay every month for the term of your loan. Mortgage bankers usually provide the funds, similar to banks, with the use of investor’s money and generally service the loan for its life. Mortgage brokers are simply businesses set up to represent many different lenders and never service nor fund your loan. They determine the best program for you based on your individual scenario. Then there is a hybrid banker/broker that may provide the funding for your loan initially but then will sell of the loan to a major bank and not service the loan.
Mortgage bankers and brokers have an advantage over banks, in that a bank will only offer you their in house programs. They might not be the “best” deal out there, or they may be able to beat the brokers. With the proliferation of bank retail branches, banks are now offering the retail branches some better programs to help draw business into these branches that now seem to be everywhere. These retail locations may get a better deal to work with than what is given to brokers from the same bank, but brokers also have access to other lenders that might have a better program for you. We work with an in house lender, Guaranteed Rate (www.guaranteedrate.com) and they are one of the top lenders, based on volume, in Chicago. They are a hybrid lender, as I described above. They sometimes fund the loan initially, but usually sell it off. There is no concern associated with that and you do not incur any extra fees, not will your interest rate change, just your coupon book will (and for security reasons, always make sure your old lender sold your loan prior to just making payments with the new coupon book).
Meeting with any of the types of lenders listed above will help you determine two very crucial components to looking for real estate. First, the lender will determine, based on a very simple debt to income ratio how much they will lend you. Second, based on your own personal budgeting, you determine how much of the money you want to spend. For example, let’s say you go into the bank and based on your income and relatively low debt they will lend you $600,000. A very quick assumption is that with 10% down, you would have a mortgage of $540,000 or roughly $3,780 per month. You may tell yourself that you want to shop for the entire amount or you may want to decrease your monthly payment. That is your call and your lender can work from the payment side too, meaning you can tell them what you are comfortable spending and they can work out the amount you can give to your Realtor®.
Once you have met with a lender and determined how much you can spend or how much you want to spend, it is a GREAT idea to have them prepare a pre-approval letter for you. You will want to provide your Realtor® with a copy of this. The pre-approval indicates not only how much you can spend but also indicates a level of seriousness to the Realtor® that you are indeed going to buy. In addition, some listing agents require a pre-approval to schedule showings and you definitely want to have it when you are presenting your offer. It shows the seller that you are ready, willing and able buyer and if there are multiple offers that come in, the seller is more likely to alleviate offers without pre-approvals in the first round. Being prepared is your best ammunition.
Getting pre-approved also gives you and your Realtor® a realistic look at what you are spending and then he or she can set you up with a search that matches what you can spend. Just guessing, using the same loan amount as your friends or siblings, etc. is NOT an effective way to do a search. For example, you tell your Buyer’s Agent that you want a $350,000 two bedroom two bath condo because your sister just bought a place for that amount. Your agent doesn’t pre-qualify you appropriately and takes you around to 5 or 6 places and you fall in love with a place. You CANNOT see yourself living any place else, period. So, you call your lender, sit down with them and they inform you that you are pre-approved for $300,000. You are now devastated and on top of that realize that you just wasted your time and your agent’s time looking for something that won’t work for you.
The opposite is equally true. I have worked with buyers that are “comfortable” spending, say, $350,000. We look around and their expectations are higher than what their comfort level will afford them. So they go and get pre-approved and whammo, they are pre-approved for $425,000 and that new price point gets them the space they want, in the neighborhood that they want with the finishes that they want. They also choose one of many options out there ranging from a 30 year fixed to a adjustable rate mortgage (ARM) to an interest only option.
Bottom line: Do your homework with a lender up front. It will set reasonable expectation for you and your agent. Impress them with the fact that you have your act together!
For an excellent resource, sign up for a free buyers’s guide. It walks you through the entire home buying process, not just the lending process. And it’s yours, just for the asking!
Mark Miles, ABR