How to Finance

Getting Pre-Approval Gives You a Stronger Negotiating Angle

Most of us have spent a great deal of time imagining our dream home; the yard full of roses encased by a white picket fence, the elegant staircase climbing around and around, the large kitchen with marble countertops, the master bath with it’s Jacuzzi tub surrounded by candles, and the waterfall pouring gracefully into the marvelous clear blue pool.

After a couple hundred hours searching far and wide for this perfect treasure, you find it! It’s everything you hoped and dreamed of for so long. After scrounging up the courage to make an offer you head to the bank to obtain your loan.

After the bank processes your application, they call. Your loan application has been denied.

Your dream just turned into a *nightmare*! How could this have happened? What could you have done to prevent this from wreaking havoc in your life? If ONLY you had gotten pre-approval from a bank before beginning the search for your dream home.

Getting pre-approval from a bank or other financial institution is imperative before beginning the search for a home. It is important to understand the price range you’re able to afford and specific aspects of your financial situation that may determine your eligibility. When you make an offer on any property a pre-approval or pre-qualification letter also gives you more opportunity to negotiate the price with the seller.

Below are explanations of two different types of “pre” letters that can be obtained from a bank or other financial institution:

Pre-Qualification letters are given as informal and tentative approvals for buyers. The financial institution issuing the letter would have taken information regarding the buyers’ financial situation in order to determine eligibility; however, they would have NOT verified the accuracy of the information. Since the financial institution would not perform a credit check of the buyer at this point they are in a position to withdraw their approval if additional financial (or other significant) factors are later uncovered. There is no charge to obtain Pre-qualification letters.

Pre-Approval letters are formal agreements and offer buyer’s a guarantee of loan approval for a specific amount. The financial institution issuing such a letter may or may not charge for this service. They will verify credit history, employment status, assets and liabilities to help determine the amount of credit they are able to offer. If you are a serious buyer, this is the suggested “pre” letter to obtain. Keep in mind that even with a pre-approval letter, your bank may deny the loan on the specific house you wish to purchase. As one example, banks will deny the loan for a specific property if the appraisal is significantly less than the sale price.

How Financing Affects The Real Estate Market

Financing is a key factor in real estate investments. Mortgage rates, prime interest rates and other factors regarding the mortgage or home loan will all help to decide whether or not the potential real estate investor is capable of obtaining a property, whether for their primary residence or as a rental investment. All of these investment variables are directly related to financing.

No matter what the economic indicators reflect, people will always need housing. Some people will invariably rent their homes, while others will want to buy a house of their own. Frequently, the only difference between a renter and a homeowner is a little matter of financing.

If you do not have great credit, financing is going to be an issue, but it may not prevent you from purchasing a home. With enough money as a down payment just about anybody can get home financing. Conversely, if you have great credit, but no cash on hand, than financing may still be difficult or almost impossible to obtain, preventing the possibility of real estate investments.

There are many different aspects of real estate financing that the financial institutions must evaluate when approving or denying a home loan or mortgage. Credit is only one of those issues. Cash on hand is always an important fact that will be looked at as well, since it will likely reflect the ability of the real estate investor to save and their ability to live within the constraints of a budget. Discretionary disposable income or the amount of cash a potential real estate investor has left after paying the monthly bills weighs heavily in the realm of real estate investment financing. When all of these economic variables are formulated and put in their proper perspective, it allows the lending institution to mathematically formulate who is eligible for home financing.

When all of the financial risks are evaluated, available mortgage packages, interest rates and other deciding factors are reduced to their lowest common denominator in order to figure out just who can purchase how much real estate. Perhaps, instead of asking how finance affects the real estate market, we should be asking how the real estate market, affects the mortgages and home financing.

Factors That Determine Loan Approval

What is your FICO?

A FICO score is a credit score developed by Fair Isaac & Company to help lenders determine the risk involved in lending money to any person applying for a loan. It is widely accepted by lenders as one of the most important components helping determine eligibility as well as specific amounts, rates and terms that can be offered. FICO scores range from 300-850. The higher your score, the less risk involved in lending to you. There are approximately 30 factors that influence your credit rating. Some of these factors, such as your payment history, weigh more heavily on eligibility than others. Every factor’s importance varies by person and can change individually as your credit history lengthens. Also keep in mind your score can change daily as new credit is established or paid down/off. All factors can be grouped into 5 main categories:

• ·Payment History – Do you make your payments on time? Since this determines (on average) 35% of your score, it is certainly in your best interest to make any and all payments on time! Your payment history includes credit cards, car payments, mortgages, student loans and other loan types. Other public records on file, such as a bankruptcy, will be calculated in this group as well. If you have been late on payments bits of additional info, such as how recently these payments were made and how much time elapsed between the due date and pay date, will also factor into your score.

• Outstanding Debt – Most people over the age of 18 have debt. The question is how much? All outstanding balances for credit cards, car loans, mortgages, etc. will determine (on average) about 30% of your score. How many of these accounts have balances? For example, if you can possible pay down significantly or pay off credit card debt, you’ll be in much better shape during loan approval. Eliminating some avenues of credit can demonstrate your willingness and ability to responsibly pay back new loans.

• Credit History – How long have you been establishing your credit? Specifically, how long have your current accounts been opened and how long as it been since you used each of them? This usually determines approximately 15% of your score. If no credit history exists, you should begin by establishing credit accounts and be sure to keep them spotless. The less history that exists, the less the loan amount you’ll likely be able to obtain.

• ·Pursuit of New Credit – Each time you apply for credit, there is an inquiry into your current credit score. How many inquiries into your credit score are there and how recent were they made? If you recently applied for a VISA card, Nordstrom account and car loan, you may want to hold off applying for a home loan for a few months. Each inquiry may slightly reduce your FICO score and may portray you as someone overindulging in credit. This usually accounts for approximately 10% of your total score.

• ·Types of Credit in Use – How many types of accounts are reported for ATM cards, car loans, credit cards, travel accounts, or any other type of account where payments are being made? This will usually determine approximately 10% of your final score as well.

Once your bank is aware of your FICO score they may or may not choose to share this information with you. Assuming they do share your score with you, it is important to remember the higher the score, the more likely you are to obtain a loan. Also, a higher score directly translates to lower interest rates. Over time with home loans, lower interest rates can play a significant role in the total amount you end of SAVING! See two examples of home loans below and the amount of money you can potentially save while boasting a great FICO score.

Example of a 30 Year Fixed Rate Loan for $150,000

As you can see, over a long period of time you would save much money if you have a good credit rating upon loan application. For this particular loan, you have the potential to save $56,520 over 30 years. That’s money that could potentially be invested into your retirement, used for vacations, a new car or two, etc. etc. It pays to keep your credit score as high as you are able. For larger loans, the savings potential climbs substantially!

Example of a 30 Year Fixed Rate Loan for $500,000

In this situation, over 30 years, you have the potential to save a whopping $186,840!!! It pays to be dependable! With the money you could save on this loan the possibilities are endless.

Now, a great FICO score will not be the only determining factor in loan approval. There are additional factors that figure into the approval process as well. Some examples include:
 

• Income – Your current income will also be a significant determining factor in loan approval. Pay stubs for the previous two months as well as W-2 forms for the previous six months as well as income and expense forms for the previous year will be requested to help determine your ability to repay the loan amount.
  
   

• Employment History – Your employment history can tell a lender much about your stability. If you’re constantly switching jobs it could raise a red flag. However, as there may be other factors influencing your employment length (such as a spouse in the military), lenders may choose to ignore this factor.
  
   

• Down Payment – Do you have a down payment? How much? Being able to provide a down payment can be extremely useful in the loan approval process. It means the amount borrowed will be less than the total cost to purchase the home or property. In some cases, depending on the amount of the down payment, your monthly payments can significantly drop.

  The important thing to remember is that no matter what your FICO score, employment history or income levels are there are things you can do to help improve your chances of obtaining loan approval. Get referrals to local credit counselors or financial advisors to help optimize your resources fully.