The first step in the home-buying process is to find out what you can afford to pay for a house, condo or co-op. This will depend on the amount of cash you have available for a down payment, your credit, income, assets, and overall financial situation.
Mortgage qualification is easier for buyers who work as employees whose income can be easily verified. Self-employed individuals or buyers with income from investments may find the qualification process more difficult.
A wrinkle in the financing end of the home-buying process is that it’s not as easy to get a preapproval letter from your mortgage broker or loan agent as it used to be. As of Jan. 1, 2010, the Department of Housing and Urban Development (HUD) began requiring lenders and mortgages brokers to issue a binding Good Faith Estimate (GFE) within three days of receiving a loan application.
Before then, buyers shopped around for a mortgage. When they saw a house they wanted to buy, they asked their loan agent or broker to provide a preapproval letter to accompany their purchase offer. The loan person would run a credit check and verify the buyers’ income and assets without, in many cases, taking a formal loan application. On the basis of this information, a preapproval letter was written.
Without a formal loan application, many lenders today will issue only a prequalification letter, which does not carry the weight of a preapproval letter. Find out from the loan representatives you talk with what kind of letter they can provide and what you have to do to get a preapproval letter.
HOUSE HUNTING TIP: You are in a much stronger position negotiating with a seller if you have a preapproval letter stating that you are qualified for the mortgage you will need to close the sale. It could be essential if you are in a multiple-offer competition. A prequalification letter may suffice in an area where there is a surplus of inventory of unsold homes.
Your goal is to buy in the best neighborhood you can afford without overextending yourself financially. Don’t buy a home that you will outgrow in the next couple of years. The economic recovery is going to take years. You don’t want to be caught having to sell at a price lower than what you paid. Even if prices don’t decline further, you won’t break even if you sell for the price you paid after taking the costs of sale into account.
Buy a home that has good resale potential. Many homes that aren’t selling in today’s market have incurable defects, such as a steep or shared driveway, a lot of stairs leading to the front door, or a location on a busy street, next to a freeway or too close to a commercial zone. An incurable defect is one you can’t change. A curable defect includes such things as deferred maintenance or an outdated décor. These can be improved.
When home prices are escalating, buyers are more willing to compromise. They’ll buy a home with an incurable defect, just to have the opportunity to buy in their desired neighborhood. Sellers don’t always have control over when they sell.
THE CLOSING: It makes sense to buy a house that has broad-based appeal and will sell well in any market.
Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author.
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