I Want It - How Do I Pay For It?

Continuing our series on the steps to buying a home or investment property with a discussion about funding your purchase. This is step 2 of a 6 part series providing a orderly plan to buying real estate.

After you've narrowed down the HOW you live, the WHAT you like and the WHERE your property should be, funding is the next step in the process. You know what you want so how do you pay for it?

What happens if you were to find a property, toured it, loved it and then found out it was way above your budget? Heartache! Lesson Learned: Get your finances in Order First. How's your credit score? If you don't know, find out. If it's less than you hoped for, work on it. The better your score, the better your chances of not only obtaining a mortgage, but also getting a better interest rate and loan terms. Unless you are paying cash for your purchase, you'll need financing. You will also need to know exactly what you can afford. And you will need to determine what types of loans you are looking for, what they mean and what the terms are. Will it be Conventional, FHA, VA, Hard Money/Private Lender, Home Equity, Commercial or something else?

So what are you qualified to buy? Now's the time to approach a Lender. There are several Lenders here in Pittsburgh PA and across the country but it's best to find one in the area in which you are looking to purchase. With that Lender, get what we call in the industry a "pre-approval letter". What a pre-approval letter does is show you the amount you are qualified to purchase. With that said there is a difference between "pre-qualification" and "pre-approval" and it helps to know what they are.

The pre-qualification stage is pretty simple. You provide a lender with your overall financial status including whatever income, assets and debt you have. After evaluation, a lender can give you a rough idea of what mortgage amount you may qualify for. A pre-qual does NOT include analysis of your credit report or an in-depth look at your ability to purchase a home. It simply allows you to discuss your goals to which a lender can provide a variety of mortgage options and make recommendations. Because this process is quick, it is based only upon the information you provide, so it is NOT a sure thing. It's just the amount for which you might expect to be approved. So, a pre-qualification does not carry the same weight as a pre-approval. Ok, so what happens during the pre-approval process?

The pre-approval phase is much more in-depth. Here you will complete a more in-depth review. From this, the lender can tell you the specific mortgage amount and purchase price for which you are pre-approved. You will also have a better idea of the interest rate you will be charged on the loan. With a pre-approval, you will receive a conditional commitment for an exact loan and purchase amount, thus allowing you to look for a home at or below that level. (Note: Once you've found your home or property and want to move ahead with a purchase offer, the lender will require the documentation through which they'll do an extensive check on your financial background and current credit rating to approve your loan. When you get to this stage, be prepared to "jump through hoops" and give the lender exactly what they ask for!)

So then you may ask "Why do both?" It may be in your best interest to do both so first you can see what you might qualify for allowing you to narrow your search to correlate with it. A pre-approval then takes a lot of the guesswork away and allows you to move quickly into the next steps when you do find that home that fits your needs. You don't want to find the property you really like, then have to wait to get a pre-approval in order to put that offer in. So best advice: Get PreApproved Now!

Confidence in your ability to buy what you want makes your real estate buying experience much less stressful. Now, go find a "Find a Realtor"!