In a competitive market, a successful buyer will choose a lender early on and get the loan process started. In addition to figuring out what you can afford and how you will finance your home purchase, starting on the loan process is critical in other ways too.
Prepare to Make a Competitive Offer
The Colorado purchase contract has a section where the buyer must specify the type and amount of the loan they are planning to obtain. This is because the loan type can affect the seller. Your loan type determines the amount of time required for closing and/or the costs that the seller will have to pay. You should have a clear idea of how you will be financing your home purchase, or what type of loan you will be seeking, before you make an offer.
Get Your Finances Together
Once you get the loan process started, you may find that you need to save some additional cash, pay off some existing loans or credit cards, or clear up some credit issues to raise your credit score. If you find this out early on, you may be able to get things set right before you lose your dream home.
There are upper limits on certain loan types depending on where you are buying. For example, with FHA loans, loan limits in Boulder County may exceed those in neighboring Weld or Gilpin counties by $100,000 or so. If you need to finance your home purchase with an FHA loan, you need to know not only how much you can afford — but where.
You may experience difficulties in purchasing certain types of properties using certain types of loans. In some condominium or townhome complexes, for example, you may not be able to use an FHA loan. In others, even conventional loans may not work.
Once you’ve met with a loan officer and they’ve run a credit check, they can typically write a “pre-qualification letter” for you. In general, this letter states that the lender believes you will be able to qualify for a loan of a specified amount and type. This is based on the information you’ve provided them and a review of your credit history. When you make an offer, having such a letter will make the seller much more comfortable. It is often difficult to get a seller to take your offer seriously if you don’t have a pre-qualification letter.
With most lenders, you can take this one step further and apply for loan approval before you find a home. If you are approved for the loan — and submit an approval letter with your offer — you'll look like a cash buyer to the seller. In some cases, this may give you some bargaining leverage. In others, it may allow you to win out over other buyers in competing for an attractive property. Having loan approval may very well make the difference between the seller accepting your offer or someone else’s.
Get it Out of the Way
Once you have made an offer and the seller has accepted it, you enter what is often the busiest period in the home buying process. You will be completing inspections, checking title work, preparing for closing, and planning your move. This will be much easier if you have most of the loan issues out of the way before you start.
Purchase with Confidence
In addition to negotiating power, loan approval makes you more comfortable when you’re searching for a home. If you know what you can afford and what your monthly payment will be, you will be able to think more clearly as you consider your housing options. You'll be off to a great start!