I often hear from buyers that they don’t yet have a “pre-approval letter” in hand. And while I appreciate the intention of that statement, because it tells me that they have not yet chatted with a lender, I always try to clarify what is truly important about those 3 words. It’s actually not about the letter. Rather it is about the conversation that one should have with the lender that should achieve the following 4 objectives:
- Objective 1 – Help you determine if there is anything preventing you from obtaining a mortgage. If there are issues with your credit score or even lack of credit, income, amount of savings, high levels of debt, etc. the lender will let you know about these issues and what you can do to correct them.
- Objective 2 – Help you determine the best loan type and down payment amount to get you to the monthly payment that works for you. Let’s face it, when buying a home, it is all about the monthly payment. Who wants to be house poor? This information will be used to determine your price range for your home search.
- Objective 3 – Provide you with an estimate of the additional home buying costs, often known as “closing costs”. On average these additional costs can be anywhere from 4-5%. This will help you understand how much cash on hand you need to buy a home for not only the down payment, but also these fees.
- Objective 4 – Identify home buying programs that you may qualify for to help you off-set your down payment and closing costs. These programs have income limits, and you want to understand if these programs will affect the interest rate. Remember, nothing is for free, including access to “free” money so please work with the lender to understand how these grant programs will affect your cash to close requirements and longer-term costs of owning the home.
If you are considering buying, I implore you to speak with a trusted lender now, before going to look at homes. Having this conversation early will help you determine if you can buy a home, and if so, what price point works best for your monthly budget. That way when you engage with a Realtor, you are not wasting time looking at homes that you cannot or don’t want to afford.