The first steps of homebuying often bring about questions regarding who homebuyers should consult with first: a mortgage lender or a real estate agent. This chicken vs. egg-like debate can lead to frustration and common mistakes for first-time homebuyers, which is why meeting with a mortgage lender should be all homebuyers' first action when considering a home purchase. Here's why.
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Knowing What You Can Afford
Buying a home is likely the largest financial purchase you will make in your lifetime, which is why meeting with a lender first is vital. While homebuying is currently cheaper than renting in all of the U.S.'s largest metro markets, you need to discuss with your lender what you can afford to borrow and what you are comfortable paying on a monthly basis. Home affordability is affected by:
- Your annual gross income
- Current mortgage rates
- Mortgage insurance
- Home type (homeowners association fees often apply to condos and townhomes)
- Credit history and score
- Fees and closing costs
- Lifestyle and future plans
Meeting with your lender prior to looking at homes can help you and your selected real estate agent narrow down possible options that are within your comfort price point and the price point your lender has pre-approved you for.
Giving You a Head Start
With mortgage interest rates at 40-year lows and a competitive housing market, being prepared to make a purchase decision (and being able to) is necessary to act quickly on a purchase offer. A pre-approval or a loan commitment is your best bet in being able to do so.
To get a pre-approval, your lender will run your credit score and compile a loan application with the information you provide regarding income, employment history, assets, etc. The lender then analyzes this information and issues a decision on whether or not you are eligible for a loan. If eligible, the lender will issue you a pre-approval stating your qualification subject to verification of certain items, such as income and assets.
A loan commitment takes pre-approval a step further. Once items on your loan application are verified through documents like tax returns, pay stubs, and bank statements, your lender can provide a loan commitment stating the amount of money eligible to be loaned, the interest rate your are qualified for, type of loan and period of time for which the commitment is good. While shopping for a home with a pre-approval is better than shopping without, a loan commitment allows you to:
- Present the best offer on a property. In multiple offer situations, a loan commitment shows that you are a serious homebuyer and are ready to purchase.
- Have peace of mind. You already have a reliable commitment from your lender for your purchase.
- Act quickly. Having your loan ready prior to finding a home will allow you to expedite the loan process.
Many real estate agents require their clients to have a pre-approval letter before compiling a purchase offer.
Though meeting with a mortgage lender should be all homebuyers' first step in the homebuying process, finding a great real estate agent is also vital to the homebuying process. Ask friends, family and your lender for a referral to an agent with experience and success in your homebuying area.
If you're interested in taking the first step to buying a home, contact one of our mortgage bankers or fill out our pre-approval form to have someone contact you. For more knowledge on homebuying in general, download our free Mortgage 101 Handbook for a guide to all things home buying and financing.