One of the first things they taught us in our real estate training class (after you get your license is when the real training begins but it's heavily focused on how to make money) is that a realtor should make sure that all their buyers have a mortgage pre approval before they spend too much time with them. The realtors that have been in the business for a while will tell you that they might go out with a buyer once without a pre approval but they insist on it before spending any more time with a buyer.
Sure. It makes sense for the realtor to know that their buyer has a mortgage pre approval but does it make sense for you as a buyer? You can do a mortgage payment calculation online and you know how much money you have and what you can afford so why bother calling a mortgage lender before you need them? Because I've been in the business long enough to know that you never know until you know and there are a myriad of gotchas out there, all of which have to do with a bunch of rules (many of which are silly) about what allows you to qualify for a mortgage and what doesn't.
First, the mortgage gods have their own ideas about how to value your income:
- It better show up on your tax return. All that cash you get from your "car wash" that your wife keeps in the storage unit doesn't count.
- If you are self-employed they're going to be more nervous about your income than if you get a paycheck from some monolithic corporation. Can you keep it up?
- Did you just get a big increase in salary or just start your career? I think they flag that also.
- You're on a commission. Oh boy!
- Your income is highly variable. Two years ago you made $100,000 but last year was really good and you made $2 MM. How do you think they are going to value that?
Second, apparently your assets don't count. I've heard numerous stories of people with more than $5 MM in the bank who are buying a $1.5 MM property with a $1.1 MM down payment and can't get the mortgage because their income isn't high enough. I swear.
Third, there are the ratios. The mortgage lenders don't care that you never go to Starbucks, only eat Ramen noodles, and drive a Ford Pinto so that you can buy a bigger home. With your income they are only going to loan you so much money.
Then there is your credit score. You pay all your bills on time, you have a pile of money sitting in the bank, you make a ton of money, and you have no debt. You should have a great credit score, right? Hell if I know. Hell if you know. You better have someone check it because little do you know that those jeans you bought online last month and didn't pay for because you returned them never made it back to the store and now your account is delinquent for $100 and you can't get a mortgage! And it might take you months to straighten this out so you better get busy. True story with some minor facts changed.
Russ Martin from Perl Mortgage puts this in perspective as follows:
Most buyers aren’t nearly as qualified as they think, nor do they understand the documentation requirements that make for a thoroughly underwritten mortgage. All pieces of the puzzle have to be there no matter how stupid...
People have to remember they are borrowing large sums of money. Mortgage lenders are not only underwriting for credit quality, but also to detect fraud and insulate themselves from future liability from investors if a mortgage goes bad. It isn’t like the old days where your banker knew you on a personal level and went to church with you on Sunday. It isn’t personal anymore. I compare it to going through security at the airport. Everyone has to submit to the mindless motions because there is a lot to lose if that one bad apple gets through.
So the bottom line is that you need to go through the pre approval process right away before you get yourself and your agent all hot and bothered about that beautiful home you want to buy and you can't finish what you started. Because you never know until you know.
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