Get pre-approval now or later?

Question

Hi all,

I'm a newbie investor trying to buy a house-hack MFH when I move to Denver in a few weeks. I want to move quickly and owner-occupy @ 20% down (don't want to do FHA). In my experience doing pre-approvals, you have to provide bank statements and pay slips for the past three months. The thing is, I have a big lump-sum payment coming up in mid-August from my (big tech) company's stock reward program.

Right now, I'm able to afford a property up to 550k, leaving a generous amount for rainy day fund, repairs, etc. In August, this big bonus will allow me to afford up to 850k, putting me in the market for bigger properties, and it makes me wonder whether I should wait until then or go forward with my pre-approval now and hope that my loan officer can take this future income into account. Time is of the essence because I'll be living around in Airbnb's and every month I wait around is a month I pay for these expensive short-term living arrangements (although cheaper these days -- thanks Corona).

Should I wait until talking to a loan officer or can they work with my situation? I don't want to do a hard credit pull only to have to do another one a month later, but I also want to know how much I can afford asap and start looking at properties in more detail. I'm already analyzing deals, but I can only do so much without an agent+loan officer working with me.

Thanks!

Stephanie P. · Answer

@Vasily R.

One credit pull every couple months will not negatively impact you if you are already in a good position (740 plus credit score). Where you could run into issues is if your score is marginal 640-680.

Contact all three bureaus and get a free copy of your credit from them and then find a loan originator to work with.  Tell them your situation and ask them not to pull your credit until you're ready.  They should be able to manually give you an approximate rate range with that information.

I would stick in the mid range house for what you're trying to do.  A mid range house in a great neighborhood is going to appreciate better than one of the higher priced houses in the same neighborhood.

Just my two cents

Stephanie

James Carlson · Answer

@Vasily R.

First off, a premature welcome to Denver. It's the best city to live. Great beer, beautiful urban parks, 300 days of sun, legal weed, countless good food and bar options, and proximity to the mountains.

I always recommend reaching out to a lender sooner rather than later. They can help you talk through the pros and cons of waiting or not. And they -- better than a real estate agent like myself -- are going to be able to tell you whether they can count that incoming income or not.

Matt M. · Answer

Just give the lender some basic info, and he/she will be able to tell you what you can afford. As long as you can source the funds, you'll be fine. I'll send you my gals info. She's awesome.

Steve K. · Answer

Without being a loan officer Or knowing your financial situation in detail I can’t make any promises Of course, but in my experience a lender should be able to let you know what you’ll qualify for and provide a preliminary prequal letter with just some basic info. Regarding the two price points that you mentioned: the larger amount will really open up your options a ton so if I were you (or your agent) I would definitely want to nail down your max purchase amount as early in the process as possible. The difference between what will be available for multifamily in Denver within those two potential budgets  is pretty drastic in terms of location and overall quality. I’m always looking at MF properties here, happy to share what’s been coming across my desk! Best, Steve

Stephanie P. · Answer

Happy to help.

Stephanie

Vasily R. · Answer

@Stephanie P.

Thanks, that's the answer I was looking for. Sounds like lenders will be flexible enough to accommodate my situation.

And you're right about the price range. I plan to look at the comps and probably a B-type location with some value-add potential. Thanks.

Vasily R. · Answer

@James Carlson that's a good point and I'm not going to be very helpful with my answer because it's both of those things! I just finished Craig Curelop's House-Hacking book and on the profitability/comfort scale I'm probably a traditional house-hacking type (leaning more comfort), meaning I want my own place but don't mind sharing a wall with another unit or two. I am ok with managing tenants by-the-room in the other units however.

It's true that the higher price range I'm looking at, the higher the mortgage, but if that gives me more bed/baths to work with then it's worth it, assuming the math works out. For example, I analyzed this recently sold quad in Lowry and I'm conservatively coming up with a $2.6k cashflow (without considering owner occupancy for now) and a 4.26% cap rate. And this is not even going by-the-room. It's by far better than many duplex deals I analyzed in the $400-500k range, all other things being similar.

Is my logic sound? Plus, higher property value will mean a higher appreciation down the line. The extra time will also give me a chance to visit more neighborhoods and get a feel for the city. The other thing happening in August is the expiration of the eviction order, so it would be interesting to see the effect of that (although evictions are a long process and we might not see much of an effect until months later).

James Carlson · Answer

@Vasily R.

Also, to address a question you did not ask. What is your goal with this property? Is it to offset your mortgage as much as possible? Is it more to have a great 10-year home and the rental income is secondary to your needs?

I ask because in Denver, $550,000 will get you a pretty good little home. At $850k, you're obviously looking at a different class of place, but you're also going to have a higher mortgage and likely less of it will be covered by whatever your rental portion is. (Though in our searches for our clients, I've seen some truly awesome homes lately with amazing rental units.)

So your initial question of whether to wait or not is also affected by what you want to do. If you want to offset more of your mortgage, then having a lower mortgage -- and therefore not needing to wait for that $800k+ qualification -- is your answer.

Cheers!

Chris Freeburg · Answer

@Vasily R.

I house hack in NW Denver myself, and think it’s a great investment strategy!

I get the desire to be prepared to move quickly and that’s a good intuition in the Denver market. Homes are still moving fast, and while demand is back at pre-COVID levels, supply is down.

As an agent, I definitely recommend getting pre-approved first. Not just because it gives you an estimate, but because it helps make the offer stronger. I’m happy to help with lender recommendations. I’ve got a great team experienced working with real estate investors. Let me know how I can help!

Get pre-approval now or later?

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