by Nancy Osborne, COO of ERATE®
Now that you've determined you're ready to make the leap into home ownership the following steps should help you get started.Refinance at Today's Low Rates!
Step One – Get a Loan Pre-Approval
Get pre-approved for a loan. It's typically a quick, automated process that shouldn't cost anything, except for a possible fee to run a credit check. Do not confuse the terms pre-qualification and pre-approval, they do not carry the same weight. A pre-qualification is a simple process whereby a Loan Agent or Officer will review your income and debts to determine the loan amount you could qualify for. A pre-approval however involves a review and actual verification of your income, debts and credit. It is a more complete evaluation of your qualifications and will involve an automated underwriting system if you have decent credit or an actual underwriter if your credit is sub-prime. A loan pre-approval has become a necessary prerequisite for any serious home buyer today. If you want to put yourself in the best possible position when making an offer on a home, you must have a loan pre-approval ready to present to the seller along with your offer (that is unless your offer involves 100% cash). An initial loan pre-approval, independently obtained on your own, is good information to have for your personal reference before beginning the search for a good real estate agent. This allows you to begin the process of defining and framing your own goals and ideas before subjecting them to the influence of outsiders.
Step Two – Finding the Right Real Estate Agent
First, Some Cautionary Advice on RE Agents:
As a buyer, you want to search for an agent who specializes in and works exclusively with buyers, also known as a Buyer's Agent. It is important to note that real estate professionals tend to also specialize by geographic area, as obviously one cannot be an expert in all markets and must limit their focus to particular neighborhoods. You probably have a general idea of the neighborhoods you want to target your search in, so it's important to find an agent who specializes in those areas where you want to target your search.
Because agents work on commission (they receive a percentage of the sales or purchase price only once the deal has closed) it's important that you and your agent are on the same page in determining how much time will be devoted to, as well as the extent of your search. To an agent time is money so they want to spend their time with serious buyers who are clear about what they are looking for and can afford. Because an agent's payday comes only at the completion of the transaction, it may be in their best interest for you to buy sooner rather than later and therefore they may not always give you the most objective advice. And as their commission is based on a percentage of the purchase price, they may also encourage you to buy more than you intended to. Be aware of this potential for bias or conflict.
Agents may also have a bias to try to sell you listings within their own brokerage or office. Typically an agent will receive a higher commission if they are able to find buyers for the listings of agents within their own brokerage firm or office. This situation is referred to as dual agency for the agent's brokerage firm and means there is a possible conflict of interest as the broker is representing the potentially opposite interests of both buyer and seller to the transaction. It is worth noting that this situation can also work to a savvy buyer's advantage in an extremely competitive seller's market for if you are able to identify a property on your own that you are clear you want to purchase (after completing your own, thorough due diligence) you may have a leg up on the other buyers if you are not represented by an agent and allow the listing agent's broker to represent you.
Agents are always under pressure to get a house sold quickly and as part of the escrow process will likely urge a buyer to use a particular home inspector to evaluate the condition of the home. Home inspectors are supposed to be objective third party evaluators of the condition of a home and should represent a buyer's interests. However an inspector who receives ongoing referrals from a particular agent may not be a true advocate of a buyer's best interests and may be more likely to find a way to help the agent get the deal done. Seller's today have a high degree of responsibility in disclosing “known defects” to the property but it is still essential to hire your own independent inspector to represent no one's interest but yours.
Next, What to Look for in an Agent:
Experience - You don't need to select an agent who's been in the business forever but you do want one with some buying or selling experience. Frequently the best agents come into real estate from other fields. If an agent possesses good communication, marketing and negotiating skills that they have picked up and utilized in other professions, all the better for you working with a well rounded agent. Also note that the best agents are almost always full timers, don't even consider working with a part time agent. And as noted previously you want to target your search for an agent to those specializing in the geographic area where you want to focus your search for a home.
Financing Fluency – As a first time buyer, you should find an agent who knows something about the loan qualification process and can competently refer you to a few lenders who are best able to help find the right loan for you. For if the loan is not approved, the entire transaction will likely fall apart. It's important to be aware that many real estate agents choose to refer their clients to lenders who have the highest approval rates. However with high rates of approval comes higher risk and with higher risk you can expect higher interest rates. If you have solid credit and income, there is no reason not to choose the lender offering you the best interest rates and financing terms. Don't go to the higher risk-higher rate lender your agent has referred you to simply because he or she knows they will approve your loan fast and close it quickly.
Top Standards – An agent's goal should be to find the highest quality home in the best possible neighborhood their client can afford. It's important that you and your agent share your same objectives and goals. You'll want an agent who is detailed oriented, patient and will make sure you have no surprises in store you after escrow closes and the home is yours. Real estate is a referral business where only the best agents make it in the long run and remain in the business. Make sure you ask around and get referrals.
Skillful Negotiating – A good real estate agent should also be a good negotiator. Putting together an offer, going through the counter offer phase and ultimately closing the deal requires a lot of finesse and an ability to keep all parties to the transaction happy and feeling they're coming out winners. A good agent will come up with solutions and keep your deal on track should it hit a bump or two in the road.
Good Character and People Skills – Having good people skills is an important asset for an agent as well. For if they cannot communicate with sufficient respect and authority to persuade you, it's unlikely they will be able to successfully handle either the listing agent or seller. Having the utmost honesty and integrity is essential. You can go to the website of the real estate licensing body authorized within your state to check to see if any complaints or grievances have been filed against an agent and to make certain their license is in good standing.Refinance at Today's Low Rates!
Step Three – Finding the Right Lender
It's important to note that the lender who helps get your loan pre-approved might not always be best suited to close the deal once you've found a property and are actually in contract. Just as in any other transaction involving money, you can save big by shopping around. Having a lot of competition is a great benefit to a consumer, it helps insure you have many options available at the best possible price. However the trade off is that you will be required to sift through the competition and narrow down your choices from which to make your final selection. There are generally three types of lenders from which you can choose to place your business: banks, mortgage bankers and mortgage brokers.
Banks – these are those large depository institutions that are household names. Mortgage loans comprise only a portion of their business as they typically offer a multitude of financial services. They are full service lenders who originate, process, underwrite, fund, close and service a loan. They carry the most overhead and expenses and are therefore less likely to offer the best rates and terms and may in fact offer slower service because they are processing a higher volume of transactions. There are some exceptions to this rule and some banks do offer discounted rates to those who are large depositors and customers of the bank and are also willing to allow automatic monthly payments to be deducted from their checking account to make their mortgage payment (this of course requires that you open a checking account with the bank). However banks will typically hold onto and service your loan after it closes so you will make your mortgage payment directly to them. Banks may also offer more flexible underwriting guidelines as they are better able to dictate and control their own levels of risk.
Mortgage Bankers – these companies are more specialized than banks, as real estate mortgages typically comprise all of their business. Mortgage bankers will underwrite, fund and sell your loan and possibly the servicing of it as well. They will likely sell your loan to secondary marketing behemoth's Fannie Mae and Freddie Mac so that they can in turn utilize those funds to make more loans. Fannie Mae and Freddie Mac then package the loans as mortgage backed securities and sell them on Wall Street as investment vehicles. The rates offered by mortgage bankers will likely be far more competitive than those offered by banks, however their underwriting guidelines tend to be less flexible and forgiving because they must comply with the guidelines of their investors.
Mortgage Brokers – they handle only the front end of the mortgage transaction; they advertise to obtain your business, then process your loan application and deliver it to another lender who will in turn formally underwrite, fund, close, sell and service your loan from there. Depending on a given client's credit and income qualifications, a broker will likely complete your loan with a mortgage banker or bank and therefore has very low overhead and expenses. A broker's rates and contacts would not be the same rates or contacts you could obtain own your own if you by-passed the mortgage broker and went directly to these companies, these are the wholesale divisions of banks and mortgage bankers not normally available on a retail basis directly to the consumer. A mortgage broker may be in the best position to offer you the best rate and terms because they potentially work with many different lenders. However this is only the case if the broker truly acts as an agent serving your best interests and searches to obtain the best rate and loan available to you. Many mortgage brokers tend to do business with only a handful of lenders and can become complacent about shopping for a good deal and instead doing what is easiest and most expedient for them. So finding the right mortgage broker can mean finding one who is honest and has a good work ethic.
In summary, when it comes to lenders, you may be better off applying with several and even if you begin the process working with only one, you can certainly speak with others to verify whether or not you are getting the best deal and terms available. If you do rely on the lender recommendation of your real estate agent it could be even more important to do a little shopping of your own on the side.
Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.
"I am addicted to Bloomberg TV" says Nancy.