Secrets to financing your home

February 16, 2023

A small fraction of homebuyers pays cash for their real estate acquisitions. The rest of us borrow money to do so. One cannot overstate the importance of getting a solid, fully underwritten loan approval before starting the process of buying a house. Most loan approvals have specific conditions attached to them. Make sure you fully understand the loan conditions and stay within those guidelines. Last-minute issues with financing can be very costly and a nightmare scenario.

Start at the beginning

Make the time to fully understand your situation and establish a purchase price you feel comfortable with. The next crucial question is exactly how much money you can borrow and what conditions you must meet to get those funds. Only a lender can answer this question. 

Start by approaching a mortgage lender or broker directly. But first, establish a relationship with a real estate professional that best suits your needs. Choosing the right real estate broker is paramount. Real estate brokers sift through and distinguish mortgage lenders who offer more favorable loan terms and better service to their clients. The real estate professional you choose should be able to help you ensure that the loan-qualifying phase goes smoothly.

Pre approval is better than pre qualification

Prequalifying for a mortgage loan is easy. Yet, it is practically purposeless. A pre-qualification letter indicates that you only discussed your financial situation with someone at the mortgage lender's office. And you neither provided any documentation nor did the lender verify any of the verbal information you provided. 

A pre-qualification letter indicates that the lender considered the broader guidelines and concluded that you would likely be approved for a loan of up to a certain amount. Then the lender issued you a letter stating that they have pre-qualified your loan application. Most pre-qualification letters include paragraphs starting with "this is subject to" followed by a list of items they need before they would issue an approval. 

A prudent seller, especially if they are represented by a season broker would prefer an offer to purchase a home with an underwritten pre approval letter over a similar offer with only a pre-qualification letter. To obtain an underwritten pre approval, you must submit all of the documents the lender may have requested. The lender will then verify the information on those documents. Some of the verifications are verbal, others in writing. 

After completing the verification process, the lender will run the application through an initial underwriting protocol. Most lenders use automated underwriting systems for loan approval. When the automated underwriting system rejects a mortgage loan application, it lists deficiencies. The borrower can then correct those and resubmit.

Because circumstances can change, lenders issue a complete and final approval only when a loan is ready to be funded. A fundamental or material change in your situation can disqualify you from the loan, even though it was approved earlier. For instance, you could lose your job a week before the house's closing – such a material fact will prevent the lender from advancing the funds. 

Lenders always check your credit just before closing. A borrower must not undertake any out-of-the-norm expenses between the initial loan approval and when the paperwork is complete, and the transaction has closed. If you plan to make big purchases, it's best to put that off until after the house is yours. 

Emiy Watson

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