In part 2 of my “Buying a home in 2018” series, I will discuss financing — How to explore your loan options and why this is an important preliminary step of the homebuying process. If you missed part 1 of this series where I went over defining home purchase objectives, you can find it here.
Unless you are planning to purchase a home without financing, a nice luxury that many of us don’t have, then you are likely planning to get a mortgage. Figuring out how you plan to pay for the house that you want to buy is equally as important as figuring out which house you want to buy.
It is important that the loan option you choose is a good fit for your financial objectives. With interest rates expected to rise, refinancing isn’t likely to be an advantageous option and a mortgage will be a long term commitment to a payment plan. Exploring the full range of mortgage options will help to ensure that the payment plan you go with is the best fit for your personal financial situation.
Now you might be thinking that by exploring financing options I mean shopping around for the lowest interest rate, but this is not the case. Interest rates are just one factor and, in my opinion, by far not the most important factor in choosing a loan and lender for most buyers. For more on this topic, check out my column from last year on choosing a lender.
Step 1: Research lender recommendations. Ask friends or neighbors who they used as their lender and if they would highly recommend them. Ask your trusted real estate professional for their recommendations based on the type of loans you are considering. There are a lot of lenders out there, only consider those with raving fans. I strongly recommend using a direct local lender who will serve as your knowledgeable financing guide on your journey to homeownership. Here is my list of questions to ask when interviewing lenders.
Step 2: Compile your income and asset statements and tax returns. When you apply for pre-approval it is common that the lender will request your most recent paystubs, bank statements, federal tax returns and any other income documentation. Having this easily accessible and ready to go in PDF format will make applying for pre-approval quick and easy.
Step 3: Apply for pre-approval. Pre-qualification is not the same as pre-approval. During the pre-approval process a lender will request asset and income statements and will check your credit score. While this may seem unnecessary and invasive, I promise it is much better to find out what you are actually able to purchase before you have invested significant time and energy in looking at properties.
Underwriting guidelines for loans are complex. The fact that you have a certain amount in savings and have a certain income doesn’t guarantee anything. Applying for pre-approval before starting your search will set you up for success, or will give you the information you need to be in a position to purchase as soon as possible.
Step 4: Decide who you plan to use for your mortgage (its OK to have an A option and B option) and maintain a relationship with them as you search for homes. As your search progresses and you view different options, reach out to them with any financing related questions. Lenders can provide tools that allow you to accurately estimate your cash to close amount and monthly payment for any house.
Knowing exactly what a house is going to cost in terms of the money you need to bring to settlement and the monthly cost is really helpful in comparing different options. When you ratify a contract you will likely have only a short period of time to submit a loan application (and that is NOT when you want to begin shopping for a lender), time is of the essence in ensuring that you are able to meet the terms and timelines in your contract.
While this may be the least fun and exciting part of the home purchase journey (for most of us) it will set you up for success and allow you to be confident in your search that you know how you plan to pay for the home that you find. Buying a home can be stressful and anxiety provoking. I’ve seen first hand how having this piece of the puzzle figured out in advance will make the overall process smoother and easier.