Why do I need to be pre-approved before I look for a home? If you are new to the home buying process then this is a valid question. After all, you “know” what you can afford and when you find a home you love then you can go through the process of actually getting a loan. Right?
Even in a buyers’ market, and this certainly is not one, you will still need to be ready with confirmation from your lender that you are able to qualify for a loan based on the purchase price. And in order to compete it is expected that you will be putting down at least 20% of the purchase price as a downpayment, 3% of which will need to be deposited into escrow within three days of contract acceptance.
Cash buyers are more and more common in the Los Angeles real estate market and if you are not fully ready to go with your offer then you will not be able to compete. No listing agent worth his or her salt will take an offer seriously if not accompanied by proof of the buyer’s ability to close. And understand, that even if you are “pre-approved” by a lender that does not guarantee that the loan will be completed. There are many hoops to jump through before you reach that stage. Also, just because you are competing against cash buyers does not mean that all is lost. If you are well prepared and present a clean offer with favorable terms you still stand a good chance of being the successful buyer.
The initial stage of talking to a lender needn’t be a difficult process. It is not a formal approval process which will come once you actually apply for the loan. Based on some basic information the lender should be able to assess whether or not you qualify for a loan, and for how much. If you are self employed you will probably be asked to provide the past two years’ tax returns amongst other information. The lender will give you an idea of what your monthly payments will be. Remember, your payments don’t just include the mortgage. You need to factor in the interest, insurance and taxes. This is the least you need to do before starting your home search. The worst thing would be to start looking at homes above your budget and then having to adjust downwards.
So when you hear a Realtor® ask you if you have spoken to a lender, don’t resist. They are helping ensure that you are in a good position end up as a homeowner.
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