If your Realtor asks you for a Pre-Approval and Verification of Assets - Thank Them!
As a full time Realtor, I often host open houses and I talk with loads of buyers many whom are first-time buyers. I'm always willing to offer tips, suggestions and advice whether they use my services or not. I'm also very curious as to their home searching experience, how long they've looking, has it been what they expected, how and where do they search for homes, etc.
Whenever I hear a buyer say "We just started looking", my first question is "Have you spoken with a lender" and their answer is typically "No".
I tell them this is the first thing they should do before anything else. Think about it. How can you go looking for a home if you don't know how much home you can afford? Have you checked your credit lately? How do you know some mistaken item has not been recorded on your credit history? Even if you were pre-approved six months ago, heck even three months ago, lending requirements are continually changing and may have an impact on your purchasing power. Besides, these days sellers require a pre-approval letter AND proof of funds to be submitted with the offer. In today's competitive market, scrambling around to get the pre-approval letter AFTER you've found a home you love may cause you to miss out on that opportunity.
Now I advise buyers to go even further than getting a pre-approval before beginning their home search.
Recently I began working with a new, first-time buyer. She provided me a recent pre-approval letter from her lender that stated her income and assets had been verified and she was approved for a particular loan amount. I contacted her loan officer personally to find out if there were any particular requirements I should be aware of with the loan program she would be getting. There was nothing of significance and we started going out looking at homes. We found a perfect place, a great deal only 2 weeks into the search. She was excited. I was excited for her. Believe me, great deals don't come by too often even in this market. This was a great deal.
We met to write up the offer with a purchase price that was less the amount for which she was approved. As we were doing that she revealed to me what she had in cash assets. It wasn't enough to close the deal. Why didn't her loan officer/lender catch that? She didn't quite have the cash assets herself to close the deal without a seller extending a significant credit – which we would of course ask for but if not agreed upon she would have no choice but to back out of the transaction. Not a good position to be in especially in the competitive entry-level market.
Furthermore, while I was meeting with her she called her lender to clarify a few things on his "worksheet". While she was on the phone with her lender I advised her to ask if she would be required to have reserves after closing. The lender's response was "Oh yes, you will need a minimum of two months reserves". In this case that meant close to an extra $4000. In addition to down payment and closing costs, she would need an extra $4000. Most lenders these days require a buyer to have some amount of reserves (savings) after closing – usually enough to cover a minimum of 2 months mortgage payment. Unfortunately, in my experience, many loan consultants forget to advise their clients of this requirement.
My client and I continued talking and began to go over her budget. The process was grueling as she tried to see if she could afford the monthly payment even if she had sufficient assets. She began deleting things from her budget like "vegetables" purchased at the farmers market, DIRECTV (okay we can live without that and switch to HULU or Netflix). She had nothing in her budget for savings or car maintenance. I asked her to think of other expenses she may incur, subscriptions required for her profession, necessary business trips, travel. She added where necessary and cut back where she could. I advised her to really think if she wanted to do this on her own. If she had proceeded with and closed on this particular purchase in her current situation, she would have had to live extremely frugally with little wiggle room in her budget, little room for emergencies.
Now don't get me wrong. If you really want to own a home some re-assessing of your spending habits, some re-prioritizing may be required. However in most cases what you gain in homeownership is well worth the temporary sacrifices – or at least that's the way it should be. Still, sacrificing your health, living on a shoestring budget, giving up all amenities, probably isn't something you're going to be able to happily sustain for very long. Besides, your health, your future, all of that is very important and should not be compromised. If you're crossing out healthy food and replacing it with McDonald's in order to purchase a home – perhaps you're not quite ready to make that move. On the other hand, you don't need to go to Starbucks daily, you can forego manicures and pedicures for a while, cut back on eating out, honestly there are many easy, non-compromising, painless ways to save.
The process my client and I went through with her budget was revealing. First it showed that even though you're pre-approved, doesn't mean you're ready to purchase. Lenders only look at your debt from your credit report, your income and (hopefully) your cash assets. They don't consider that you may want to (and absolutely should) save money each month, may want to put money aside to travel, may need to go on business trips, will probably need to fix your car at some point, may have a pet and pet medical bills, must pay utilities, put gas in your car, etc.
The good thing is it showed my client exactly what she had to do to be ready. She now knew where she stood, and what her options were to be able to achieve her goal. We're still looking. She now has ample assets via equity sharing and, with the support of family members who see the value of investing at this time, will be able to proceed with a purchase. She lost the good deal though and that is unfortunate and could have been avoided had her loan consultant been more thorough.
So, if your Realtor asks you for a pre-approval letter and verification of assets – thank them!
If you're thinking of buying a home, come see me. I'd be happy to go over your budget, assure your loan officer or consultant has given you all the facts, and if needed, refer you to loan consultants I know and trust. I'll help you be sure you are truly ready to embark on the home buying process, purchase a home, and make the monthly payments without compromising vital areas of your life and your future.