Not Pre-Approved for a Mortgage? You’re Wasting Your Real Estate Agent’s (& Your Own) Time.

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Many years ago, when I was starting out as a real estate agent, I was just plain desperate to get my first deal done. It’s funny when I think back because I was only 26 years old when I got the bright idea to go into real estate to hopefully make a lot of money and build my fortune there. The only problem I had — besides inexperience — was not too many people would trust a younger person with selling their most valuable asset (their home).

So, my first real quest was to just find buyers. The other agents and I did anything and everything to try to find them, starting with our own network, which was small at the time. Then, we moved to working a geographic area, holding open houses, and even answering the phone in the office to hopefully get some buyer leads.

One of my first customers was this lady who called in and was looking for a house. Bingo! This would be my first sale, right? Well, not exactly. I met her at the property she called about, and then later we started to meet each week at my office before going out to look at more houses. But, of course, I made the huge mistake of not having her get pre-qualified for a mortgage.

For the next several weeks, I served as her tour guide and taxi driver until she finally found a house that she liked. Then when we met with the lender, we quickly found out that her credit was shot, and it would be very difficult for her to buy a house at that time. I was devastated because I had wasted so much time.

Related: Pre-Qualifying vs. Pre-Approved: Know the Difference or Lose the Deal

Window Shopping

It was then that I realized real estate is a finance-driven business, and I decided that my new quest was to become an expert in the finance side of things. Otherwise, I was potentially spinning my wheels and may never have made a commission.

So, why is getting pre-qualified so important?

When starting out, many people go through a period of discovery, which today is mostly done on the internet. They decide they want to buy their first house (or their next house), and they start to investigate what’s out there. Maybe they’re tired of paying rent and want some tax breaks, maybe they want to build some equity to increase their net worth, or maybe they just don’t want to have a mortgage payment in retirement. But regardless of one’s motivation, it ultimately comes down to this: If you don’t sit down with the lender to get pre-qualified (even if it’s done by phone or computer), you are just window shopping.

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Common Mistakes

Have you ever experienced sticker shock when going to buy something? For many people, it happens with larger purchases, like buying a car. When it comes to shopping for a house, most folks have an idea of what they can afford as a monthly payment, but they may get sticker shock on the cash required to close (i.e. down payment and closing costs).

You need to look at not only what you can afford from the bank’s point of view, but also the whole, overall picture.

Once, I had a lady who was looking to downsize as she was nearing retirement, but she quickly found out that she could no longer afford the modest condo she wanted because she had cosigned her son’s new truck loan.

Another time, a friend from high school wanted to buy a home with his wealthy father as a cosigner, only to find out the father was worse than he was in the eyes of the bank because he had many assets but very little extra income.

Often, people can make small, subtle mistakes just by taking on too much debt or even by paying off their debt too soon. Yes, you heard me right. I had a client once who thought it was smart to pay off a debt before buying a home, but what he didn’t realize was that the low monthly payment wasn’t hurting his back-end ratio, and he used up a lot of his cash that could’ve been saved as additional reserves.

While the bank calculates both your front-end ratio (typically 28% of your gross monthly income) and your back-end ratio (typically 36% of your gross monthly income minus your monthly recurring debt), they use the smaller of the two numbers as your maximum amount towards PITI (monthly payment, interest, taxes, and insurance). Even if this amount is higher than what you’re paying monthly in rent, you would still need to consider the mortgage interest deduction you’d be getting at tax time.

So, besides running these numbers, what else can you do to get ready to purchase your first home?

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Related: 7 Mortgage Qualification Tips for Borderline Borrowers

Getting Ready

It should be quite obvious that there’s plenty one can do to prepare to buy that first property (or the next property). Things the banks consider besides just credit scores usually revolve around stability.

For example, where have you lived and worked for the last two years? Have you paid your rent on time? Have you saved up money for your down payment and closing costs yourself? Banks typically request to see two or three months of bank statements to ensure you didn’t borrow the money prior to applying for a mortgage.

Today, getting the financing for a property can be pretty involved, especially in the current heavily regulated mortgage market. Of course, the first mortgage can be one of the toughest, so be sure to ask your loan officer about any special programs currently being offered as well. Whether you’re brand-new or just new to the current market, it’s time well spent if you’re looking at where you are now and what you may need to do to prepare.

Happy house hunting!

Any other ways you’d prepare for mortgage applications?

Let me know with a comment!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

4 Comments

  1. Katie Rogers

    I agree that a person who cannot afford a house should not waste an agent’s time. But a pre-approval is not necessarily the answer. I have not met a lender who will give a pre-approval so you can go shopping. they want to know the address, purchase price and down payment for of a specific house first. Then they want reams of personal information. If you try to shop around, every one of them want the same reams of personal info. That is too much personal info to spreading around. After 3 months, the pre-approval has “expired” anyway.

    Another problem I ran into is when I did get a pre-approval for the maximum amount I could afford (even if I had no intention of paying that much), once the agent saw that big number, getting them to “unanchor” from that number was nearly impossible. They became bound and determined to push you to spend to the limits of your affordability.

    What I do is prepare a proof-of-funds statement for my agent. I include a couple pay stubs, the summary page of the credit report, and the last bank statement of the account I will draw the down payment from. I redact account numbers and social security numbers. The agent is then comfortable with shopping because they know I can afford the house. The lack of a specific pre-approval amount keeps them from anchoring on a big number.

    Now what about people who want to buy using other people’s money? That is a whole ‘nother ball of wax.

  2. Tyler Huntington

    A few corrections:

    Back end ratio = housing plus (not minus) recurring debt.

    The front and back end ratios vary widely across loan programs. If you are paying PMI, max front end and back end ratio cannot exceed 43% including the PMI. Have 20% down and excellent credit, I’ve seen Debt ratios up to 49%! On FHA loans you can go up to 57% back end ratio!

    A high percent of window shoppers could not afford to buy if ratios were 28/36

    There is also the property tax deduction also!

    My biggest piece of advice, if your credit is in the tank, straighten it out before you buy. The difference between a 679 fico and a 701 could mean thousands of $ in or out of your pocket.

    If you have a cookie cutter scenario a-la: w2, down payment is seasoned in a single bank account, and a fico over 700. Getting approved does NOT require paper work. Just be advised, your loan officer is relying on the info you’re providing to give you a thumbs up (or down) in your price range and then back it up with some pre approval verbiage on letter head.

    If you want to shop or look around, pdf all your docs, throw them in to Google Drive or any other cloud storage. When you consult with a loan officer, the last person we want to work with is someone who is unorganized. Get your stuff together in advance and be ready to jump hoops. When your offer is accepted, check in with your LO daily if they aren’t checking with you. Be Proactive!

    Sorry Dave, not trying to steal your thunder. I’m just a passionate loan officer.

  3. A post worth reading! Rightly said you have to be pre-approved for a mortgage and yes it has to be a real one where the lender has not just verified your credit but your bank statements and tax returns as well. If you are mistaking pre-approval as prequalification then for your information, a pre-approval demands the lender to verify borrower’s info and documentation to determine exactly how much he can lend to the borrower whereas prequalification is the buyers’ information that helps the lender to estimate how much the borrower could qualify for. If you are not preapproved, you are wasting both you and your agent’s time.

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