Probably the biggest difference between a real estate investor and a homeowner is how they approach financing a property purchase. Investors look for creative financing solutions that meet their investing needs. A homeowner’s purchase is just as much of an investment and these people should take a few pages from the investor’s strategy book. Not all of these strategies (such as money partners or cross-collateralization) are applicable to the average homebuyer but many others do work. Homebuyers just need to be a little more aggressive and spend some time learning about their options.
Begin by thinking rather than doing. You’re going to need professional help whether this is your first home purchase or your fifth. Getting started, the two most important professionals to engage are a real estate broker and a mortgage broker. There are two important considerations when engaging both. First, don’t allow the conversation to be a one-way interview qualifying you as a client. As part of your thinking process, develop a list of questions you want them to answer. If you’re unsure what questions to ask, seek out a friend or relative that has recently purchased a home to ask what frustrated them and what questions or information they felt were important or lacking. Also, ask the professionals for a few references of people you can talk to about their experience. As part of your thinking go beyond interview type questions. Develop a list of steps in the process you need more or current information about. For instance, if the last time you purchased a home the old HUD-1 form was used at closing, you want to become familiar with the current Closing Disclosure form. Also, there are a lot of fees and costs involved with a home purchase. Whether the buyer or the seller traditionally pays specific fees varies by location but most are negotiable. Be sure you know what is traditional and what can be negotiated. If you have trouble thinking of questions and information you need answers to, ask the first few professionals you talk with for a checklist to get you started.
Learn about mortgage options. How much do you know about paying points down? Is this better for your circumstances than making a larger down payment? Have you considered a 20 or 15-year mortgage rather than the traditional 30-year mortgage? You might be surprised to learn how little your monthly payment goes up when you pay your mortgage off in half the time. You can learn about this from an online mortgage calculator or by talking to a mortgage broker. Don’t hesitate to ask about other mortgage products that are available. The industry has changed tremendously over the past 20 years.
Entire books are written on the many types of home loans available. You need to at least know how the most common ones differ to determine which is best for you. A few of the common ones include: Conventional Mortgage, FHA Mortgage, VA Loan, USDA Rural Housing Loan, Adjustable Rate Mortgage (ARM), and 203k Rehab Loan.
Know the difference between pre-qualified and pre-approved. These are two separate steps early in the mortgage process. Being pre-qualified doesn’t guarantee you’ll be approved for a mortgage. A pre-qualification is typically free and based on the financial information you provide to the lender. Pre-qualification can be done online or with a telephone call. The lender pre-qualifies you based on the information you provide without documentation and without verification. Once you are pre-qualified is a good time to ask more detailed questions about what type of mortgage you are being qualified for and what else is available. If you don’t qualify for a mortgage or not one high enough for your desired purchase price, it’s a good time to discuss with lenders what you might change about your finances to improve your chances of success.
Pre-approval comes with a limited loan guarantee. You’ll have to complete a mortgage application and usually pay a fee. You’ll also have to provide official documentation that you probably don’t have at your fingertips. With pre-approval, you receive a conditional commitment in writing for an exact loan amount. This allows you to look for a home at or below the approved mortgage amount plus your down payment. Obviously, this puts you at an advantage when dealing with a potential seller because he or she will know you're one step closer to obtaining an actual mortgage. Although the lender verifies your financials at this point, these will be verified again shortly before closing. Final approval is based on there being no significant negative changes in your finances (a good reason not to go out and charge a house full of new furniture before closing). The final approval is called a "loan commitment," which is only issued by the lender when it has approved you and the specific house being purchased (after the appraisal).
There’s more to a mortgage than being pre-approved. There are many things you want to know about the mortgage you are taking out. You want to know how the monthly mortgage payment fits into your monthly budget and where you might have to cut back spending (if at all). You also want to know what your monthly mortgage payment will include such as the escrow account for taxes, homeowners insurance, PMI, and HOA fees.
Everyone’s life and financial situations are different. Mortgages are not one size fits all. Not only do you want to end up with a home you’ll love for years, but you also want a mortgage that you’ll be comfortable with for all of those years. A few things to you want a full understanding of are:
This article raises more questions than it answers. The purpose is to get you thinking about what is probably the biggest investment you’ll make so that you structure a deal best meeting your needs and situation.
Please comment below about any unique approaches you have for obtaining a mortgage. Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].