The real issue with real estate financing is not getting a loan (virtually anyone willing to pay lofty interest rates can find a mortgage). Instead, the idea is to get the loan that's right for you -- the mortgage with the lowest cost and best terms; the loan that’s right for your lifestyle budget.
We at the Ramirez Office strongly advise our buyers to get pre-approved before writing an offer. As a buyer, you have one chance to make a first impression on the owner of your new potential home; you want to look qualified, motivated, and reasonable. As agents, we have one chance at a first impression in that initial offer situation, it’s part of our job to provide you the most leverage as possible. An integral part of that leverage is showing that you’re qualified to purchase their home; that you’re the solution to their potential selling problem.
We also recommend getting pre-approved for other, equally important reasons: Purchase contracts have a standard qualification contingency. Buyers are by default required to provide proof of pre-approval for the property’s purchase price and sufficient funds to close escrow. It’s much better clear this preliminary hurdle before hand:
Second, you’ll have ample time to interview and select a lender in whom you have confidence – you won’t be in a 7-day rush to find a loan.
Third, you’ll discover beforehand any potential problems with your credit, and thus allow yourself the opportunity to correct them before committing to an interest rate. Moreover, you’ll again appear like a qualified buyer – thus increasing your negotiating leverage.
A "Pre-approval" means you have met with a loan officer, your credit files have been reviewed, and the loan officer believes you can readily qualify for a given loan amount with one or more specific mortgage programs. Based on this information, the lender will provide a preapproval letter, which shows your borrowing power. You can visit as many lenders as you like and get several preapprovals, but keep in mind that each one carries with it a new credit check, which will show up on future credit reports. However, although credit agencies routinely update their practices, most lenders concur that all credit checks run for home purchase mortgages within a 10-day window count as one inquiry. So if you feel obligated to ‘shop’ lenders, do so within a quick timeframe.
Although not a final loan commitment, the preapproval letter can be shown Listing Agents and their sellers when bidding on a home. It demonstrates your financial strength and shows that you have the ability to go through with a purchase. This information is important to owners since they do not want to accept an offer that is likely to fail because financing cannot be obtained; a very common occurrence with unqualified buyers.
There are two general categories of lenders; direct lenders and mortgage brokers. Direct lenders, as their title suggests, are direct representatives of a bank. A loan officer at (for example) Wells Fargo, is technically a Wells Fargo employee. Direct Lenders have only one source of money, the bank they work for – although nearly all banks offer extremely flexible and competitive loan types and interest rates.
Mortgage Brokers are the brokers; they are an intermediary between you (the borrower) and the source of money (the lender). The sources of money that a mortgage broker has access to are many.
However, most often brokers will obtain loans (the money) from commercial banks, such as Wells Fargo. With other sources of money in addition to banks, such as credit agencies or even private individuals, mortgage brokers in general can provide more options and are also able to find a loan for “less qualified” borrowers: borrowers with credit problems or who are self-employed and have trouble providing income documentation.
We at the Ramirez Office always recommend using a local lender, or someone whom you know and trust. Accountability is extremely important; we believe you should be able to sit down with your lender face to face.
When getting pre-approved the loan officer will carefully review your financial situation, including but not limited to your credit report and employment history. The lender will then suggest programs which most-closely meet your needs. For instance, a first-time buyer may opt for an interest-only loan or a mortgage with a 40 year term to keep their payments down. Or, a move-up or buyer with a substantial down payment may opt to pay a point in order to lower their interest rate. 100% financing is another topic altogether; as it is perhaps the least understood financing option, we highly recommend that a borrower thoroughly understand this form of “creative financing” before committing.