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11 Steps to Buying the Home That’s Right for You – Step 3: Get Pre-Approved!

house-on-money-small.jpgSo you’ve made it through the first two steps in the home buying purchase and you’ve picked your REALTOR®. You’re on your way to buying your own little piece of San Francisco real estate. But you’re not ready to get out there and go home shopping just yet.
First, you need to know how much you can afford. It’s scary how few people are out home shopping without having a clue as to what price range they should be shopping in. When I first meet clients, I always ask them how much home they think they can afford. The answers NEVER match the truth – they are either WAY more (I had a client come to me thinking they were in the $600-700K price range when they were in the $1.2M price range) or WAY less (another client thought they could swing $700-800K but couldn’t afford $500K) than reality.
Either way, if your impression of what you can afford doesn’t match your reality, then you are, frankly, wasting your time.
So, before ebmark on your SF home search, you need to get approved by a lender. Your REALTOR® will be able to refer you to a good lender (assuming you’ve picked a good REALTOR®, that is). You can also approach your bank, or your credit union, but usually you’ll find a mortgage broker can shop around for the best rate for you.
In order to get pre-approved, you’ll need to provide your lender with the following:

  • Your bank account numbers and the address of your bank branch, along with checking and savings account statements for the previous 2-3 months
  • Pay stubs, W2 withholding forms, tax returns for two years, or other proof of employment and income verification
  • Credit card bills for the past few billing periods, or canceled checks for rent or utility bill payments, to show payment history and amount of revolving debt
  • Information on other consumer debt such as car loans, furniture loans, student loans and retail credit cards
  • Balance sheets and tax returns, if you are self-employed
  • Any gift letters, if you are using a gift from a parent or relative or other organization to help pay the down payment and/or closing costs. (This letter simply states that the money is in fact a gift and will not have to be repaid.)
  • Once you get the lender this information, you should be able to find out if you qualify for a loan. I say “IF” because not everyone qualifies, especially in the current stricter mortgage market. You can no longer drive a sixty thousand dollar car (which you pay for every month), carry twenty thousand dollars in credit card debt (which you pay for every month), earn a “good” living and expect to be approved for a no money down home loan (or any home loan for that matter.)
    Your lender is NOT a magician. You need a good credit score, a good income, a strong down payment, AND money in reserves – and then you’ve got a shot at qualifying for a loan.
    Assuming that you are a good candidate to be a homeowner, you will likely get your pre-approval within a few days at most (unless your situation is extremely complicated… every case is different, especially if you have something other than a regular salaried job.) But one thing to keep in mind – just because you are approved for a certain amount, that doesn’t mean you need to spend THE ENTIRE AMOUNT!
    For some frugal folks, using the entire amount of the funding is very realistic. I have a few clients that have done away with their cars (along with that car insurance, gas, mechanic’s bills) and keep a tight budget elsewhere in life, but want to buy the most home they can afford. They have a lot in savings (even after the purchase) and can comfortably maintain their lifestyle without any changes.
    For folks that like to live a carefree lifestyle that includes a lot of debt and a lot of spending, even a huge paycheck may not cover their home and their lifestyle, in which case they’ll want to budget less for a home so that they can maintain the life they’re used to. Others may have plans that include a huge lifestyle change in the future – for instance a few couples I’m working with are shopping a few hundred thousand dollars below their approval amount because they plan to start families, and the the soon to be mommies want to take a few years off from working to stay home with baby (leaving them with one income instead of two.)
    A good lender will not just tell you how much house you qualify for, but will also help you to determine how much house you can afford. Along with that, they will also get you the best interest rate and loan terms, and provide you with exceptional service from start to finish.
    And once you are pre-approved for a loan, and have determined your true home buying budget, you are ready to start shopping! (That’s the fun part!) Stay tuned for Step 3 to to Buying the Home That’s Right for You – Fine Tune Your Search.