The Home Loan Process

So you have made a New Year’s resolution to finally become a home owner in 2011. You have saved a little money, done your research on school districts, area attractions, and conveniences. You know what area of town you want to purchase in and what kind of house you want. You have already even picked out the furniture and have an interior consultant lined up. With much excitement and hopeful expectation, you call up the realtorthat was recommend to you by a very close friend, introduce yourself and tell them you have a house you are very interested in seeing. Then they ask you the one question you had not thought about, “Have you been prequalified yet?”. You swallow discretely and anxiously respond that you had not even thought about that part, but that you are sure it will not be an issue. The realtor then plants both your feet on the ground and wisely informs you that before you can even go see the house, the listing agent(the realtor selling the house) will want to see a prequalification letter ( “prequal”) from a reputable lender. The realtor also goes on to inform you that they will also need the prequal in order to more effectively perform an accurate house search and advise you if this property does not work out.

Other Benefits

Ok, you agree, this was an important first step and it makes sense. But is there any other advantage to getting prequalified first? Absolutely! As illustrated above, in today’s market place, they key to working with a good realtor and grabbing the attention of any listing agent is the prequal. I mean, why would any real estate professional want to spend their valuable time and incur a lot of travel expense to take you all over the city if your financing plans are solely based on hope. Considering that in today’s credit environment, getting a mortgage loan is not a simple matter, a home buyer should be sufficiently motivated by the peace of mind they receive when a great deal of the uncertainty in the dreaded finance process is eliminated prior to falling in love with the “ideal dream” home. Let me stress this point, HOPE is not valid assumption when it comes to the financing aspect of purchasing a home, it will only lead to frustration and disappointment. So if there is going to be bad news, get it out of the way upfront, don’t wait until you are deeper in the process.

But even if you have an 800 middle score, six digit income, $50K in the bankand little debt, it still makes sense for you to get prequalified. Why? Because your future home should enhance your quality of life and not be a ball and chain around your neck. What I mean is that a prequal letter should not simply be a document that reassures that some lender has looked at financial ratios, guidelines and formulas to determine that you qualify for a mortgage. A prequalification should be the result of a deeper and holistic process where you and a qualified mortgage professional enter into a trusted relationship that helps you identify important issues on the finance side that will enhance and not detract from your life style. For example, a mortgage professional should never simply give you a prequal letter for the maximum amount you qualify without speaking to you about payment and cash-to-close expectations. Without asking questions and promoting deeper reflection, on paper, you may qualify for a $3,500 monthly payment because you have no debt and appear to have sufficient income and assets, but the loan officer has not taken into account that you like to buy seasons tickets to some local sports event, take an annual trip to Disney with the kids and to Europe with your spouse while socking away 10% in your 401k and $500/month for your children’s education. So what a considerate loan consultant should be asking you are questions that prompt you to consider what type of discretionary income you desire or require to maintain a level of consumption and savings that fit your life style and overall financial plan.

A good holistic question is, not how much house you want to buy, but what is the maximum total monthly payment your willing to make (PITI+MI + HOA= Principal + Interest+ Taxes+ Insurance as well as Mortgage Insurance and or Monthly Home Owner Association Dues)? From your response, a conscientious loan officer can work in your cash-to-close objectives, type of financing that will be used as well as any required third party assistance (i.e. local, state or federal down payment assistance, grants, gifts..) and derive a loan amount. From the loan amount, loan parameters and cash-to-close objectives, the loan officer can proceed tell you and your realtor what price range to be looking in and what the purchase price ceiling should be so that you do not get above your head and into a house that will not allow you to live within your means or your current financial plan. Again, you do not want to spend countless hours and expense to find a home that meets your geographic, structural and functional expectations but blows your budgetary goals out of the water.

Looking at the Whole Picture

Because a realtor only gets paid if they close on a deal, and because their business is built on quality referral business and happy customers, it is in their best interest to recommend to you a good loan officer. If you have done your research and the realtor comes to you as a referral from a trusted friend or family member, then also trust them on the recommend loan officer. Don’t make your decision solely on quoted interest rate and closing costs. Take into account the consultative process and the support you will receive during the prequalification stage, during the loan phase and after the closing when you may questions about the servicing of your loan. Remember, anyone can promise you what you want to hear if trust and moral character are not part of the loan officer’s business model. In the end, a quoted rate or closing costs that appear to be far better than anything else in the market is useless if simply a bait and switch tactic that is implemented under the protection of a myriad of legal conditions and underwriting assumptions which you agree to when you sign the mortgage disclosures (The dreaded fine print and asterisks!). Also, promises mean nothing if the loan cannot close on time due to mismanagement by the loan officer and lender, and you lose the house and your deposit due to breach of contract.

Just as you must invest time with an architect to design a house from the footers to the chimney, look at your loan officer as a mortgage/financial architect that will assist you in designing the best financing plan for you based on your financial and quality of life objectives. Once you have completed the prequalification process, you can now proceed with confidence in approaching a buyer's agent and future listing agents, as well the assurance that you will be buying a home that will meet your short and long term financial and life style objectives.

However, remember that no matter how good your loan officer is, the consultative process and resulting prequalification is only as good as the information you provide him/her verbally. If you do not feel comfortable in interpreting certain financial aspects of your economic portrait (i.e. complex business tax returns, variable income sources, etc.), you may want to move ahead to the next level and do a credit Pre-Approval, where you submit original source documents like paystubs, W2’s, 1099’s, tax returns, bank statements, etc. and let the loan officer make a more solid credit determination. In the end as in all financial transactions transparency and honesty from the start is the best policy. Finally, be candid and helpful to the loan officer during the prequal or preapproval stage, ultimately, though it will never be as exciting as looking for that home of your dreams, it will save you a lot of time, expense, potential frustration and even disappointment in the end.