When I work with home buyers, I always recommend that they make sure to get their finances in order before beginning their home search. This is a very important process to ensure a more successful real estate purchase. Here are the key steps you will need to take.
Step 1: Figure Out Your Financing Plan
There are different ways you can finance the purchase of a home. The most common method is getting a mortgage loan. If that is the plan, then you will want to start gathering up all the necessary documentation (bank records, employment verification, tax returns, debt statements, etc.) and do everything you can in advance to improve your financial situation. Work to reduce debt-to-income (DTI) ratio, save up for a higher down payment and increase your credit score. These will all help you in qualifying for a home loan and securing better mortgage rates and terms.
If you are a cash buyer, you are definitely at an advantage over mortgage borrowers. You will have fewer concerns and hassles when it comes to making purchase offers and closing the real estate transaction. However, you will still want to have all your financial records and account statements in order to show proof of funds during the home search process. This will make things go as smoothly as possible when you start making offers. Cash buyers can skip directly to step 4 below.
Step 2: Talk to Multiple Lenders
If you are borrowing the money to buy your home, it is always a good idea to talk to multiple lenders before finalizing your mortgage plan. Different lenders may be able to offer different mortgage products and benefits. You also want to find someone who you trust to help guide you through the process and give you honest financial advice. Interview them carefully and make them work to earn your business. In addition, you should understand there are two types of mortgage lenders out there:
Direct Lenders—A direct lender is a bank or other lending institution that provides their own financing. Though they may ultimately sell the mortgage loan to another bank or lender, they are initially financing the home loan and can provide certain benefits that brokers cannot. At the same time, they may have limited mortgage products available based on their specific home loan services.
Mortgage Brokers—A mortgage broker is a service provider who will shop around on your behalf. They may have relationships with multiple lending institutions and can help you explore a wider variety of options. They are not providing the financing themselves, though, so that can bring some complications.
I recommend working with either a direct lender or mortgage broker for your home loan. You might also want to talk with your primary bank, who may offer mortgage services and give you benefits as an existing customer. It is worth noting that some direct big bank loans can have more red tape and take a little longer to secure, so this is why it pays to talk with multiple lending sources before making any major financial decisions.
Step 3: Secure a Pre-Approval Letter
When talking with lenders, you will want to get at least a pre-qualification letter from them that shows you have talked and they have given you a basic idea of what they will be willing to lend (assuming you qualify when the application is processed and the final loan is underwritten). However, it is important to know that most sellers in a competitive real estate market (like what we have now in Southern California) will require a mortgage pre-approval letter rather than a basic pre-qualification.
A mortgage pre-approval is a more in-depth process where you have actually submitted your application paperwork and financial documentation. It has been reviewed and the lender is able to give you a stronger verification of the loan funds for which you are pre-approved. The loan will still have to be finalized by an underwriter during the closing process, but your loan is on much stronger footing with a pre-approval letter in hand. Sellers obviously like to see pre-approval letters in purchase offers because they know the buyer has more secure funding in place.
Step 4: Start Your Home Search
Now that you have your finances in better order, you have researched your loan options with different lenders and you have secured a mortgage pre-approval (or your cash is ready if you are a cash buyer), you can start your home search with much more confidence. You are leaving less to chance and your purchase offers will have stronger appeal to sellers who not only want the best selling price, but also want a buyer who’s funding won’t fall through and derail the transaction.
If you are ready to start your home search process in the Los Angeles or San Gabriel Valley area, or if you want some quality mortgage lender referrals, contact The HD Group today.