The House is the Cart, the Horse is the Mortgage

It might be a cliché, but when buying a home, "Don't put the cart before the horse," is sage advice. I hate to say it — but I must — almost every potential home buyer I meet begins his or her journey trying to push the horse with the cart.

As Realtors, we realize that once you've decided to do something as exciting as look for a house, it's the natural thing to ... well, go out and look at houses. The problem is that looking at houses when you haven't been pre-approved for a mortgage is akin to going shopping and not knowing what size you wear — it's a waste of time and energy, because most of the houses won't "fit."

More often than not, the pre-approval process starts after a buyer has fallen in love with a home, and then there's a big rush to figure out something as important as how you're going to pay for it. It's also the "Murphy's real-estate law" that there always seems to be another offer looming once you've decided to write an offer. A house can sit unloved and unwanted for five months, but the moment you decide to buy it, it's like a subliminal message goes out to every potential home buyer in the universe: "Psst... someone is buying your house. Quick, go write an offer, too!"

However, buyers who have their financing in order are steps ahead—they have leverage, negotiating power. There's also less angst about the financial aspects, because they've figured it out in advance, which means you can focus on the other important aspects of purchasing a home, like whether this house is truly right for you.

You might be able to afford more than you think, or maybe less. You might not want to afford what you can afford. And it only takes a quick consultation with an experienced mortgage broker or loan officer to find this out. The real issue for most people regarding real-estate financing is not getting a loan; it's finding the loan that's right for you, the mortgage with the lowest cost and best terms.

The best place to start with the pre-approval process is with a referral from someone you trust. If you begin the approval process ahead of time, you have plenty of time to research three lenders, which is ideal.

If you haven't purchased a home before, there's quite a learning curve to understanding mortgages, and beginning early will give you plenty of time to absorb it all. As a buyer, you need to know what your house payment will be, including property taxes and insurance. You also need to take into account future financial issues such as college tuition, child care or whether you will need a new car in a year. Getting pre-approved also will give you a pretty close idea of how much money you will need to come in with at the close of escrow. This amount will include items such as the down payment, loan origination fees, prepaid property taxes and homeowners insurance, appraisal fees, title insurance and escrow and notary fees.

If it's been awhile since you took out a mortgage, as Bob Dylan once said, "The times, they are a changin'." A pulse and a promise are no longer the sole requirements. The lending process has changed dramatically.

"There's much more scrutinizing from every angle on all documentation, including income, bank deposits, assets, and employment status and history," says Jim Louchis, a longtime Clayton resident and senior loan consultant with Walnut Creek-based RPM Mortgage.

Realtors also recommend getting pre-approved for another important reason—most sellers won't even look at an offer on their home without a pre-approval letter attached to it. Not only do California purchase forms and bank addendums (from banks selling foreclosed homes) require buyers to apply for financing within seven to 10 days, but the custom in our region is to provide a pre-approval letter up front.

What exactly is a pre-approval? It means you have met with a loan officer or mortgage broker who has checked your credit and reviewed your income and employment and believe you can qualify for a given loan amount with one or more mortgage programs. Based on this information, they issue you a pre-approval letter that the Realtor then sends with your offer to purchase a property. You can get pre-approved with as many lenders as you like, but each one will check your credit report. The letter is not a final loan commitment. The buyer still has to go through the underwriting process, but it demonstrates the buyer's ability to obtain financing.

It's not the exciting part, I know. That's why you never see people copying their pay stubs and tax returns on "House Hunters International." Still, the next time, a seemingly pesky agent gently asks you: "Have you been pre-approved for a mortgage yet," understand we really are trying to help save you time, and OK, maybe ourselves a little bit, too.

But don't resist. Getting pre-approved is the very first and most important step that will provide you with a logical road map to follow to the houses you can afford.

Look for House Hunt on Thursdays, too, when Julie will showcase a few of the homes for sale in the area.