Why get Pre-Approved?

With lending requirements having changed with the mortgage meltdown, pre-approval is now more of a necessity.  First off, getting a pre-approval letter from a lender will allow you to concentrate your search on homes that meet your budget.  The benefits also include the ability to find out if you have any credit issues that may have been erroneously reported to the credit bureau, the insight into what requirements you will need to fulfill to obtain financing, and also give you a better negotiating position when you find the home of your dreams.  How?

Consider this as a buyer, you have a pre-approval letter from a reputable lender(they are out there), you have already gathered the required documentation that they have asked to have submitted, and if any problems arise with credit, those have been resolved.  All you need now is a home that meets your needs.  Because you have taken the necessary steps to obtain the loan prior to writing a contract, you will have more information that the Realtor can use in properly stipulating the financing method (conventional, FHA, VA, THDA, etc).  You also gain position in that you are ready to close in a more timely manner.  To sellers, time is money.  Closing in 2 or 3 weeks is much more attractive from a financial bargaining position, then closing in 30-45 days typically. 

With a good faith estimate from the lender, you know what money you will have to bring to the closing table as well.  Should you ask for the seller to help pay any of these expenses, you will also know the limit of their legal participation.  Remember this though, when having the seller pay for part of your closing costs, you are paying them anyway.  If we take for example that today you can buy “property A” for $100, 000 Cash and close immediately,  versus buying the same property for $102,000 and seller paying $2000 in closing costs.  The seller nets the same thing, and possibly if the home does appraise for the higher price all is well.  In this scenario though you have actually just financed that $2000 over the life of the loan, so yes, you are still paying for it.

Where we have seen issues with this is when you go to sell.  Lets go a bit on the wild side, and say that 2 days after closing you decide to sell.  If the cash price was actually $100,000, wouldn’t it be safe to assume that is market value.  So where does the other $2000 come from, when you close you get to pay it back.  Financing closing costs is a pay me now or pay me later situation.  As long as you stay in the home long enough for appreciation to occur and cover these expenses, as well as any selling expenses, and the principal payments reduce the loan balance, you end up and make money.  Sell too soon, you loose. 

Real estate has never been a short term investment.  On average most families stay in a home from 7-10 years, so take this into consideration when you are buying.  You have to have a roof over your head, and depending on your tax situation, owning real estate can be a great investment.  Until December 1, 2009, as a first time homebuyer you are entitled to an $8000 tax credit….it is fantastic!  Catch though, you have to live in the home for 3 years, cannot have owned a principal residence in last 3 years as well.  Before you automatically assume you are entitled, check with a CPA or tax specialist.

Spring is here, and rates are great, inventory is up.  This is the best buyers market we have seen in decades.  Do not look back 5 or 10 years from now and wish you had bought in 2009.

For a great resource on buying and selling, searching for homes, and much more, go to www.renow.com .

Happy St. Patricks Day!