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May 18, 2017 | No comments yetTags: approval, buying, financing, loan, real estate
Buying real estate can be one of the most exciting processes you’ll ever go through, or it can be one of the most frustrating. To help insure that it’s more the former than the latter, it’s really, really important to know what you’re doing, and follow the process. Trust me, after all these years, we know a thing or two about how to get you through this in the most efficient way possible.
That’s not to say that the process doesn’t change over time. Sometimes, steps are added or removed from the process, and sometimes the steps are put into a different order. The major steps, of course, all always there.
How we used to go about buying real estate
For example, back in the olden days when I first got into the business, the customary process went something like this:
1. Find the property
2. Make an offer
3. Negotiate, if necessary
4. Apply for a loan
5. Do your due diligence inspections
6. Wait for loan approval
7. Get insurance
Can you see the flaw in the system?
Take a look at step #4. You’re half-way through the process before you know if you can afford to buy the house. We were almost done before we found out that we would not be finishing the race. The race had been cancelled. It was heart-breaking to find out the bank didn’t think you were worthy. Your dream home suddenly became a nightmare.
On the seller’s side, of course, this process meant that they were taking the property off the market. They were hoping that everything went through OK. If it didn’t, and the bank denied a loan, the seller would have to put the property back on the market after weeks of being unavailable. The window of opportunity might have closed. Sellers started getting really hesitant to accept offers that included financing.
Changes in buying real estate
Now, we all know that buying real estate usually involves financing. It would never work for sellers to insist on cash-only transactions. Still, the sellers needed some kind of assurance that they were not wasting their time — and possibly money — by accepting a contract that would never close. So, we started having buyers get pre-qualified by a lender to help provide some assurance.
A pre-qualification is better than nothing, but not by much. It only means that the lender has made a quick look at your numbers. Without verifying anything, the lender has decided that it looks likely you’ll be able to afford the house. The sellers could breathe a little easier. As long as all your numbers could be verified, and the house appraised for at least the contract amount, everything was good.
Until it wasn’t.
Pre-qualifying vs. pre-approving
Because here’s the thing: sometimes buyers didn’t really paint the whole picture. Sometimes — honestly or not — they forgot about payments they were obligated to make. Maybe their income is more variable than they let on. It would all get exposed when a formal loan application was made, but in the meantime, when a contract failed, the seller was in the same position as ever: having the property off the market for weeks.
Something had to change, so of course the market responded. Instead of pre-qualifying, we tried getting buyers pre-approved. This added strength to the task by having the lender take a look at the buyer’s credit report. It answered a lot of questions, and prevented a lot of bad contracts, no doubt, but there were still some surprises that popped up later in the process. Some things were never checked until the loan application was reviewed by the lender’s underwriting department. They were rare, to be sure, but that didn’t matter if your deal was the one caught in that particular trap.
Besides, if everyone is doing a thing — such as getting pre-approved — where is the strategic benefit to the buyer? What makes a particular offer stand out?
Buying real estate today
The next step in this evolution was to have the buyer get fully approved, all the way through underwriting before an offer was submitted. Finally, we could make an offer that the seller could be comfortable with. The buyer would be able to — financially, at least — get to the closing table.
So that’s where we are now. We’ve moved the financing component to the beginning of the process. Frankly, that’s where it should have been all along. There is no point in looking at houses if you can’t afford to buy them, right? That frustrates everybody involved, including, ultimately, you. I know, I know, a boy can dream, and I’m not going to stop you. If you’ve got your heart set on becoming a home owner — and good for you for doing that — let’s talk. Let’s get your plan figured out, and get you taking the steps toward your dream. But, please, let’s do them in the right order, OK?
Until next time, remember, when you’re searching for real estate services in Highlands Ranch and the south metro Denver, Colorado area, I’m ready to help you however I can, and I’m never too busy for you or your referrals. You need only reach out to me.
Randall Brennan, REALTOR
EQUITY COLORADO REAL ESTATE
Randall is a real estate broker and REALTOR plying his trade in the southern part of the Denver, Colorado metropolitan area, including the cities and communities of Highlands Ranch, Littleton, Englewood, and Centennial. He finds interest in just about anything, but especially in history, photography, endurance sports, and permaculture gardening.
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