Monday, September 19, 2011

Buyer's Guide - Step #4 - Getting Pre-Qualified and Finding a Realtor

Up until this point in the process, it's been your time and energy spent on this endeavor and you will feel no shame if you wake up one day and decide you don't want to pursue this any further.  In this next step, you'll start to involve some others so it's probably a good idea to be past the point of just casually browsing.

I will pretty much guarantee that if you get pre-qualified or find a Realtor earlier in your process, they will be absolutely supportive if you all put forth some effort but decide to bail on your plan to buy a home.  They will tell you "I understand, you've got my card, please think of me if you start looking again" and they will mean it.  So I will also say, if you want to get others involved earlier in your process, go for it.  It might make more sense too - maybe you've got more debt than you'd like to admit to and you'd rather have a professional run some numbers to see if you can really get as big of a mortgage as you think.

I think the key message here in the intro is to recognize that these professionals are spending time with you when they could be with another potential client, so be respectful of their time.

Getting Pre-Qualified
Getting pre-qualified helps you find out (again, in rough terms) how much money a bank would be willing to loan you.  Once you have been pre-qualified, it's also a good signal to a Realtor that you are serious.

You can feel free to get pre-qualified online through a big bank like Bank of America, or go to your local bank to do so.  You might want to consider calling a Realtor first, if you have a reference, and tell them "I want you to help me look for a home, but I'd first like to get pre-qualified so that I have a better sense of what I can afford.  Could you recommend someone to me?".

Real Estate is a local business, and you'll find that many Realtors and mortgage brokers work together frequently and have a good sense of who gets deals done, whose deals tend to be hectic, and who shouldn't be dealt with at all.

The process of getting pre-qualified is simple.  A website or banker will ask for some basic information about your income, checking / savings levels, and your social security number so that they can pull your credit report.
* Warning *  I was told by one banker that I should be concerned about having my credit report pulled by multiple bankers / brokers because it can negatively affect my credit score.  I was later told and have more or less confirmed through research that this is not true.  Yes, having your credit pulled multiple times can affect your score, but the systems are actually more sophisticated - if your credit is pulled for a real estate related transaction, it doesn't matter if another mortgage broker pulls it.  I think the erroneous statement stems from the generalization that having your credit pulled means you are opening a line of credit, which isn't always the case, and it also might come from those who don't want you to shop around / go elsewhere.  There isn't a real purpose to shopping around for a pre-qualification, but don't feel like getting pre-qualified by Bank of America somehow obligates you to choose them for your mortgage.  They will, however, call you and follow up to try and get your business.

After the bank has your information, credit report, and credit score, they will give you a piece of paper saying you are pre-qualified for a $xxx,xxx mortgage.  It by no means says they are ready to write you a loan, but more says "based on our initial impression, we'd guess we could give you a mortgage of this amount if everything checks out".

Finding a Realtor
If you're reading my blog then you are likely new to the home purchasing process.  So the answer to the basic question of "do I need a realtor" is YES.  If a realtor is representing you, they are known as a Buyer's Agent.  When you and your Buyer's Agent go to an open house that you are interested in, the agent running the open house is known as the Listing Agent or Seller's Agent.  One more complicated situation can arise if your Buyer's Agent is the Seller's Agent for a home you want to purchase.  In this case, his allegiance is to the Seller, so you should be aware.

First things first - in the most simple terms, the Buyer's Agent works for free.  You will never receive a bill from a Buyer's Agent for anything.  He or she gets paid when you buy a house.  The Seller's Agent might get a 5% commission on the value of a house that he/she sells.  If you come make an offer with your Buyer's Agent, and you are the winning bid, the seller of the home will have to pay 6% in commission, which is split 3% and 3% between the Buyer's and Seller's agents.

You can also make the argument that this commission is baked into the sale price, and therefore you, as the buyer are paying both agents.  I agree this is a more accurate statement, but as a buyer, you are likely working through the math of what your mortgage payment will be and are worried about receiving a bill from a Realtor for his/her commission - it won't come, so don't worry.

Finding a Realtor seems to most often come via reference.  If you know anyone in the area who has bought or sold a home, ask them about their experience with their broker and for a referral.  Sites like Zillow.com have lots of Realtor listings and advertisements.

Finding a Realtor who has completed lots of transactions goes back to my earlier point about being connected.  A good Realtor will know the other Realtors and be able to help you in your negotiations if and when you put in an offer.  He/she will also know lots of mortgage brokers, lawyers, and inspectors and they will all owe him/her a favor which could come in handy for you.

In our case, our Realtor helped us find our mortgage broker, lawyer, home inspector, and was also able to push them a bit since we were trying to get a deal done on a shorter time frame.  He also was able to speak with the Seller's Agent and work with him to get the seller comfortable with the idea that we would be buying using an FHA loan and that we would not be putting much down.  I could easily see us having lost our home without this kind of help.


Now you are pre-qualified and you've found a Realtor.  You know about how much you can afford, and you have someone on your team ready to answer you question (simple, complex, or in between).  You are almost ready to Get Out There - See Some Houses

When to Get Pre-Approved?
Getting pre-qualified is simple.  Getting pre-approved is more involved.  A letter of pre-approval will be necessary if you are putting in a bid on a house.  So if you are going to go out and see houses with the hope of finding the right one, it would make sense to be pre-approved so that you can put in a bid if you are ready.

To get pre-approved, you must first choose your bank or mortgage broker.  This is a serious decision and will have profound implications on your home buying process.  I will probably write a completely separate post on whether to get a mortgage broker or not, but I will try to quickly distill the concepts here.

A mortgage broker is someone who will hold your hand through the process and make sure you are moving along at a fast enough pace.  They have access to many ultimate lenders, and therefore can likely get you very good rates.  Your Realtor should have some recommendations as to which mortgage broker to use.  You want someone that is local and someone that will be available, not someone at a 1-800 number that you can only get on the phone on rare occasions.

So why not use a mortgage broker?  They will charge you origination and/or processing fees, and they also might be earning a spread between what the lender is willing to quote and what you will ultimately have to pay.  This can increase your costs.  There are also plenty of horror stories out there where an unscrupulous  mortgage broker can provide you with false information and end up blowing up your whole deal.

On the other hand, you can use a site like www.bankrate.com to see what kinds of mortgage rates you might be able to get.  You can then work directly with a bank of your choosing, which will assign you to a loan officer.  This may be someone at your local branch or it could be someone from the loan division which is located hundreds of miles away.

In either case, the person you work with has plenty of incentive to make sure you get a mortgage.

Onto the Pre-Approval
Now that you've got your broker / banker lined up (we selected a mortgage broker), they'll start requesting every financial document you have and you'll have to put together a mortgage application.

After they've reviewed your documentation, a pre-approval letter is issued.  This letter enables you to make an offer on a house, but really doesn't mean much.  No one has committed to loaning you the money you need and a lot can change.


Whether you've gone ahead with pre-approval or decided to wait, it's time to get out there and start searching.

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