What's the deal with Pre-Approvals?

Question

I am a first time home-buyer/ real estate investor in the DMV (DC, Maryland, Virginia). I am currently looking at properties with an agent and I have some questions about the pre-approval process. I know that I must secure my financing before I begin to make offers, but there is a lot I am still unsure about. I would welcome all wisdom and experience related to the following.

1. I am still trying to figure out my investment strategy. However I know that I will be house hacking/renting out rooms and holding. At this point I could go after a multi-unit home needing renovations or a SFH with rooms or basements for rent. I am looking at places that are recently renovated, to well maintained, to needing significant work in multiple areas (anywhere in greater DMV). Given these uncertainties, should I still go after a pre-approval?

2. In addition to the above uncertainties, I have private lenders who are interested in loaning my money for a decent rate. However the lender that my agent referred me to does not do split title or shared equity. Is it worth it to get pre approved from this lender? Would I still have the ability to get a loan from them but then privately borrow the personal money for renovations?

3. What is everyone's thoughts on the 203k loan? My agent seems to think a conventional is better suited for me.

4. Is it worth it to get pre approved from multiple lenders? How long do these letters of approval last and should I only get it if I know I am going to make an offer in a certain amount of time?

Thank you for your time and expertise, BP!

Mike Cumbie · Answer

Hi @Anthony Tortorello,

I will default to others on most because I am sure you will get some good advice. However I will give my thoughts on the 203K loan in general.

It is great for homeowners who are not handy and will be living in the home for years to come. Every task has to be performed by a licensed contractor who bids out and tracks paperwork. Often times in the flip world or even buy and hold you may utilize some "handyman services" to handle items on the list. You can't do that with a 203K loan. It is more of a project tracked by the lender than a project you are running. Closer to a new build where the builder performs tasks and the bank verifies goal lines are met before releasing funds.

Just my 2 cents and good luck!

Michael Lee · Answer

Hello Anthony!  You evidently have got a bunch to learn.  First off, anyone making money on single family homes are lucky or they pay close attention to the demand in that area because the turnover cost and/or the 0% occupancy rate is killing them.  if you have spent as much time here in learning as I have you would know better and you would have seen as many bad stories as good ones if you look.  My main interest here is to see you succeed.  The reason you should have a pre-qualification letter is that not only helps the current seller and tells you how much you can borrow.  If you can pay cash it really does not matter.  There is plenty of lenders out there now but most of them want to be involved in a good deal.  A better way with single family homes is to buy them and then become a "lease option" owner who does financing to good people that have not qualified with a Bank and do not know about the alternatives and they will usually take better care of the home because they think they will own some day, collect a larger non-refundable deposit, the monthly spread between your payment and the rent during that period, and then make money on the sale option.  9 times out of 10 they usually do not purchase the home but you can do it again. Studying that area in the past performance of home values can help you predict the future but it is still a little difficult.  That will give you 3 ways to make money while helping people out.  If you are going to buy you ought to buy apartment complexes or 3 or 4 unit houses and be a home hacker to get you started if your cash is low and you want to deal with a Bank that does that type of loan. The experience that you should have going there is a myth. At the very least, shop around for the best deal on your loan.  Those letters are good for about 6 months.  You need only one letter.  What you will actually do does depends on your lenders ability to close, the quicker is usually better.  A conventional loan is typically the lowest interest rate but requires 20 or 25% down payment plus any fees they charge.  A relationship with the Lender will usually help you but I have heard the Banks have gotten a little tougher.  It is not usually that tough but should provide you with a little confidence to have one of those letters.  I'm sorry if my feeling made you a little upset, I apologize but I do want you to do well.  Do not overlook owner financing as a possibility. I do want you to now that I am glad that you have taken action and I wish you the best.  i was a real estate broker in Texas for about 30 years.

Abel Curiel · Answer

Hey @Anthony Tortorello,

1. Yes, you should get a pre-approval. This will give you and your agent a sense of direction as you'll have a clear sense of what your buying power is. It should also help you identify the best strategies for you.

2. Not 100% sure on this so I'll pass and hopefully some of our other BP members will chime in.

3. 203K loans have slightly higher interest rates than other FHA loans. Going the conventional route will keep your monthly payment down.

4. You don't need to go to multiple lenders just yet. It could affect your credit score. The letters are usually good for 2-3 months. Once you're under contract, you can shop around to different lenders to find the best rate and terms.

Best of luck to you!

Abel

What's the deal with Pre-Approvals?

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