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DAWN FLORIO REAL ESTATE
BROKERED BY RE/MAX 1ST REALTY
The single most important first step to buying a property is to get pre-approved with a lender, or to obtain a Proof of Funds Letter from your financial institution if you plan a cash purchase.
More and more, sellers are requiring buyers who wish to see their home in a showing to show their ability to purchase ahead of time.
Lender Pre-Approval
Understanding the lending process is important for anyone who needs to borrow money in order to purchase real estate. Obtaining a mortgage is a matter of meeting the lender's financial expectations.
Generally speaking, a lender will want to know if you are a reliable person who will make their payments consistently and on time. They will examine your employment history, credit score, and financial situation as a whole in order to decide if you are a good, low-risk investment. Many lenders will want to see a consistent work history for at least two years prior to taking out the loan. They will run the potential borrower's credit score and look for a score of at least 580 for FHA loan products, and at least 620 for conventional loans. Last, they will examine your debt-to-income (DTI) ratio and calculate how much debt you can handle without tipping over the recommended DTI ratio of 47%.
At this point they'll be able to say whether you're a credit-worthy borrower, and if you are, they will provide what's known as a pre-approval letter which is needed for the the offer-making and negotiation process with us, your realtors. Once the home is under contract, the deep-digging into finances continues, and a borrower may have more hoops to jump through to prove their credit-worthiness. Title work and appraisal will take place, and as long as title is clear and the appraisal comes back at or above the negotiated purchase price, we can proceed to closing.
There are a number of different loan product options available for various financial situations. The down payment amount will usually dictate which product a borrow ends up with. Those who can afford a down payment of 5-20% will be best served by what is known as a "conventional loan." These loans meet the requirements set by the secondary mortgage market.
Loan products that allow less than 5% down include Rural Development and VA loans at 0% down, and FHA loans at 3.5% down. Many lenders may also offer a variety in-house loan products, so be sure to speak with your trusted lender advisor to find out every option at your disposal!
While we are waiting for your loan to go through all the required processes, it's very important that you do not take out any new loans or alter your credit score! Wait until AFTER you close on your home or property to do anything that requires more credit; purchasing a vehicle, signing up for new credit cards, racking up existing credit cards, etc.
Proof of Funds Letter
The Cash-Purchaser's path to pre-qualification comes in the form of a Proof of Funds Letter. This can be obtained from the financial institution which holds the account that will be used for the purchase. With an official letter, we don't need dollar amounts or anything that would be a breach of privacy - just a statement from the financial institution that you have the funds needed to execute the purchase.
Alternatively, if we are in a hurry or you prefer a different approach, we have also used a simple screen shot of the bank account (with account numbers redacted of course) as a proof of funds. This reveals more personal information but if you're comfortable with it, so are we.