Unless You're Paying All Cash, Call A Lender Before Looking for Your Home

by Deniece Watkins, Realtor - Cashin Company, Los Altos
in cooperation with Alfredo Ramirez of United Home Loans
March 2008

When you begin thinking about buying a home or investment property, the prudent first step is to talk to a lender. It sets you, the buyer, up for a chronologically correct plan for success, especially in our area.

MONTHLY PAYMENTS
Your lender will let you know what to expect to pay monthly based on how much you can and want to pay for the price of the property. They will inform you of loan options available to you at the time of your purchase. Maybe you want to pay principal plus interest? Maybe you want to pay interest only? Maybe you want to pay your loan off in 15 years? Maybe you want to pay money up front (buy down points which are a tax write off on your initial purchase) to buy down the interest rate you will pay over time on the loan? Maybe if you put more or less money as a down payment on the property, you can benefit from a different monthly payment? These are only some of many choices available to you, the borrower.

DOWN PAYMENT
If you put 20% down on your principal residence, what will your monthly payments be? Will a lender allow you to make a 10% down payment? If you are considering an investment property in a county that has been subject to a lot of short-sales and foreclosures in the recent banking debacle, what down payment do they require for the county and city in which you are interested in buying? (Some lenders are requiring 35% down payment on investment properties right now. There are cases where 25% down payment is being required for a principal residence as well!)

CREDIT SCORE
So you think that "in general" you qualify for a $750,000 house. However, you haven't checked your credit score recently and seen that some credit card company made a mistake and recorded a late payment on your account that caused your 700 FICO score to drop to 645. Do you know that can affect the loan amount for which you qualify? It can affect the interest rate available to you, and it can also affect the amount that you need to put down on the home. The free credit report you can get online is not the same report used by a lender. The report you get when you buy a car is not the same either. (By the way, buy your car only AFTER you close escrow on your house to help your credit score for your home purchase.)

RESERVES
Based on your FICO score, based on your down payment, and based on your income, you may be required to have more savings "reserves" as part of your qualifying for the loan you want. These reserves range anywhere from two to twelve months of anticipated principal, interest, taxes and insurance (PITI).

PRICE RANGE
The lender will tell you the highest price you CAN pay for your home, based on the monthly payments you prefer, based on the down payment that works for you, based on your credit score, based on rents received (income property), based on you considering the property an investment property, an income property or second home. You get to conclude the price range you WANT to buy in from there.

GUIDELINES ARE CHANGING
Because there have been so many changes going on with banks lately, it is more important than ever to have a relationship with a lender. What was available to borrowers a month ago is not something a borrower can be certain of today. It is not exaggerating to say that guidelines are changing daily right now.

REQUIRED DOCUMENTATION
A lender needs certain documentation to approve your loan. This documentation is typically, two months pay stubs (to prove your income), two months of all asset statements (to prove your down payment and reserves), and it is possible that you will also be required to provide two years worth of tax returns. A loan application will also be required, along with your recent credit scores (specific report run by your lender).

ON TO STEP TWO
Once you have concluded all of your above choices, you can go out and look for a home to buy, knowing you can actually buy it. You will not be shocked or overwhelmed with all of these details after you have found a property you love.

99% of people instinctively look for a home, then talk with a lender, then the home is gone, or they don't like the payments, or they don't get a tax write off, and they change their mind and end up getting frustrated. That frustration frequently causes a buyer to give up their home purchase all together, sometimes missing a perfect time to buy.

Talk to a lender first, then find your home. When you have spoken with your lender, not only will the home you want just fall in place for you, but you will have more time when you enter into contract on that dream home to pay attention to all of the documentation your Realtor will be needing to go over with you.