He's a young police officer from Columbia with a stable job, healthy savings account, and a strong desire to take advantage of the current buyers' market to purchase his first home. Yet he's puzzled and intimidated by the home buying process. Where to begin?
The Columbia man's first step should be to sit down with a mortgage lender for a preliminary idea of his borrowing capacity, real estate experts advise. Known in the industry as a "pre-qualification session," or "pre-qual" for short, such a meeting can save time and spare the buyer the disappointment of picking a property above his range.
"The danger is if you go looking around first at For Sale properties, you're going to fall in love with a five-bedroom mansion when all you probably can afford is a starter home. Why break your own heart?" says Paul Havemann, a vice president at HSH Associates, a mortgage publishing firm.
The pre-qualification process shows you the field in which you can play ball and gives you estimates of down payment and closing costs under a variety of mortgage options. See JAMES, 12J, Col. 1JAMES, from 1JSitting down with the lender, you can calmly compare an adjustable-rate vs. a fixed-rate mortgage, for instance.
"Pre-qualification allows you to know the rules upfront so you won't get your heart set on a house you can't afford," says Peggy Rhodes, a vice president at Loyola Federal, theBaltimore-based savings and loan.
Not only will pre-qualification give you an accurate sense of your borrowing capacity (subject to changes in rates and terms), it will also give you a basic grasp of housing finance generally, including key terminology.
Most lenders will ply you with booklets on subjects ranging from federal mortgage disclosure to underwriting guidelines, the basis onwhich loan decisions are made. As you talk to the lender and read what he's given you, your intimidation will melt away. This will let you move into the home-buying process with more confidence.
Pre-qualification can also allow you to remove obstacles to your home purchase at an early stage. It can add urgency to your need to accumulate cash through a crash sav
ings program. By bringing your home-buying goal in focus, it should give you more motivation to save.
In addition, errors in your credit reports will often turn up during this process, allowing you time to gain corrections from the credit agency to put you back in good standing.
"Studies show that there are lots of errors on credit reports and if your name is John Smith you'll probably have problems for sure," says Mr. Havemann, cautioning that it can take several months to resolve a credit problem so that your home-buying ability is not impaired.
Becoming pre-qualified for a mortgage can also give you negotiating power when it comes to making a contract offer on a property, points out Peter G. Miller of Silver Spring, author of a new book entitled "Buy Your First Home Now," published by HarperCollins Publishers.
"The advantage is that if you walk in to negotiate with the seller, you have tremendous leverage because there's no question about your ability to afford the property. If the choice is between your offer and someone whose financial arrangements are unknown, the seller will prefer your offer," Mr. Miller says.
Negotiating from a position of strength is always preferable, even in a buyer's market where there may be few other contenders for the property. It can influence the price at which you buy as well as other terms.
You'll probably want to select a lender or lenders to pre-qualify you on the basis of their mortgage rates and referrals from friends and acquaintances. Then it's probably best to set an appointment to meet with the lender in person rather than attempt to do the pre-qualification interview by telephone.
"The lender's not inclined to give you the same amount of attention over the phone. Furthermore, if you meet with the lender, you're going to be developing a personal relationship. By coming in, he'll get the impression you're a serious shopper and not just a window-shopper," says Mr. Havemann of HSH Associates.
When your interview date comes up, it's good to bring with you the basic data the lender will need to pre-qualify you for a mortgage. That includes one or two recent pay stubs, assuming your income is stable and you're not self-employed.
Self-employed people or those who work on commission are likely to need tax returns going back two years.
You should also bring with you information on your assets, such as bank and savings account statements, and information on your monthly debt obligations, including any loan or bill that won't be fully paid off before your intended date of closing on the house.
In addition, it's prudent to bring with you reports from one or two credit bureaus with whom the lender deals (find out in advance who these are). Your credit rating can have a significant bearing on your ability to borrow for a mortgage and credit reports are relatively inexpensive to obtain.
To be sure, many realty agents can take you through the pre-qualification process and there are advantages to having your realty agent ask the questions about your financial status.
Although their specialty is sales rather than finance, many agents have educated themselves about mortgage alternatives. And your agent may be better informed about a variety of loan programs, while the lender will likely be more wedded to his own products.
"Obviously, if you go to a Chevy dealer, he's not going to sell you a Ford," Mr. Havemann notes.
On the other hand, Mr. Havemann says, you may be more comfortable dealing with a conservative financial institution in making an assessment of how much you wish to borrow. In these days of economic turbulence, many homebuyers are opting to borrow less than they might.
"The danger," says Mr. Havemann, "is that a real estate broker may try to move you into a slightly higher property than you may be comfortable with."