You are hereNow that I’ve been pre-approved, what next?

Now that I’ve been pre-approved, what next?

With the pre-approval in hand then you can really get serious about finding a house.  But before you do make sure you understand what you’ve discovered going thru the pre-approval process which is to make sure you know what and how purchasing a house is going to impact your personal finances. 

One of the issues that Loan Officers seldom take into consideration is what your lifestyle habits are.  Some people like to eat out several times a week, or go to their local coffee house and sip their favorite blend several times a week.  Others will take the family out for entertainment regularly.  Even though these may not sound like much when you talk about how they add up during the course of a month it can be substantial and before you make that commitment figure out how this will impact your lifestyle.  All these events are things you may have grown accustomed to and may require a bit of sacrifice from you so you need to evaluate what it will take to handle your commitments.  Are you willing to change your lifestyle if necessary and will that new payment be something you can handle? 

When a Loan Officer gets an approval it is strictly based on raw data and does not consider lifestyle habits at all.  For instance an FHA loan will allow a debt-to-income ratio of 55% and to put that into perspective, if you have a combined gross family income of $5,000 per month, that would allow you to have total monthly obligations of $2,750.  By the way, FHA is rumored to be revising their criteria so 55% might change.  After you deduct withholdings there is not a whole lot of money remaining to live on so make sure you’ll be able to adapt to that payment. 

With the recent mortgage debacle many things have come to light but the fact that many people were remiss in figuring their monthly outgo and lifestyle including their new projected monthly payments put many people into compromising financial situations.  That is the reason a thorough analysis of your finances not only in the past but also going forward is an absolute necessity. 

If you’ve assessed your finances and decide it is going to make sense I would recommend getting ahold of your accountant or bookkeeping professional as they should also be able to shed light on things such as the tax advantages of purchasing a home versus renting and your net overall costs.  Combine those with future values and the difference on an annual basis from what you’re paying now for rent and it might not be that different.  But, the first year irregardless of how well you plan will be a big adjustment from what you’re used to. 

At this point you will want to have a sit down session with your Realtor and basically bring them up to speed with what you want and expect in your future home.  You’ll also want to share with them what you’ve found as far as your pre-approval goes including any terms, conditions and potential loan amounts as well as the type of loan(Conventional, Government, etc).  Try to be as specific as possible because you owe it to your Real Estate professional to make sure they’re not chasing properties you don’t qualify for or you’re not interested in because time is valuable to both of you.   

A couple of things regarding Realtors.  There are many outstanding Real Estate professionals but you have to understand that they are very motivated to make a sale because with rare exception that is how a Real Estate professional gets paid.  You as a potential buyer need to have somebody that you trust to protect your interests including your deposit.  You work hard for your money and the last thing you want to do is to jeopardize your Good Faith Deposit Money because of a misunderstanding in the terms of a placed or accepted offer. 

There are many areas of a Retail Purchase Agreement that you need to understand as a buyer but I want to concentrate on the contingencies portion and especially the timing as far as the financial and appraisal contingencies are concerned.  One of the big things owners of foreclosed properties are doing these days is to put in either no time or a very short period of time for lifting the financial contingency which is the amount of time a person has to get approved for their loan.  In California the normal time is 17 days but it is not unusual to see 10 days or less.  If you have a pre-approval it is not so bad because in theory most of the work is already done but in the case of a pre-qualify that might not be so easy and you certainly don’t want to lose a deposit because you couldn’t get approved for the loan which goes hand in hand with working with your Loan Officer. 

Another big subject is the appraisal and since the HVCC(Home Valuation Code of Conduct) has been enacted, many values are not coming in with regards to the accepted Sales Price.  With most Government Loans there is a form which is to be signed by all parties called the Amendatory Clause/Real Estate Certification.  This disclosure basically states that should the property not appraise for at least the agreed upon Sale Price, the buyer may withdraw without penalty from the transaction and not lose any deposited funds.  It is still important that the Selling parties sign this form as acknowledgement of this clause.

In the case of a value not equal to or greater than the sale price in non-governmental loans, the buyer could be liable to perform the sale or risk losing their deposit but the issue that will come up is what would need to be done by the buyer in order to perform and proceed with the sale.  When you have a lender involved(non-cash sale) transaction you must remember that the entire loan will be predicated on the appraised value.  If a buyer wants to proceed in this situation that person will have to pay the difference between the sale price and the appraised value so let’s say you have an agreed price of $250,000 and the appraisal value winds up being $220,000.  If the buyer were to proceed, they would have to pay the difference in this example of $30,000 plus their normal fees(closing costs plus down payment).  If the money is not available to proceed with the transaction then the deposit could very easily revert to the Sellers.  But again a good Realtor is going to point this out and make sure you understand the potential liabilities of either of these situations so just proceed with  caution.  There are also other significant parts of that contract too but you want to make sure you’re going to have a good working knowledge of what should take place and your liabilities in the process should your offer get accepted.