Unless your bank account can cover a check for hundreds of thousands of dollars, you'll need to borrow money to purchase a house. That's where your mortgage loan enters the transaction. However, you should start the process of securing financing before you make an offer on a home so when the time comes, you'll be ready, willing and able to purchase the property.
There are two preliminary steps available to most consumers: pre-qualification and pre-approval. Even though these terms sound interchangeable, they mean very different things.
If a lender pre-qualifies you, it gives you an idea of how much money you might be able to borrow. You provide the lender with your income, debts and important details of your credit history. The lender crunches some numbers and comes up with how many dollars the bank might let you borrow. He'll give you a conditional qualification letter, which determines your likelihood of securing such a loan.
Of course, the lender hasn't yet verified the information you provided. And he hasn't guaranteed anything. Your loan application could be rejected.
The process of pre-approval involves actually filling out a mortgage loan application. The lender closely examines your income and credit report, and calculates how much the bank will let you borrow. He will then give you a letter that commits in writing to a loan amount. You can use this commitment to show sellers that you're serious about buying their home-and you can afford it.
You can walk away
You need not borrow the amount you're pre-approved for simply because the lender will give you such a pile of cash. Examine your situation closely to see how much debt you're comfortable with. The lender makes his determination, but only you know the true state of you finances or any future debt you may incur.
You're also free to borrow zero dollars. Until you actually win final loan approval and sign the paperwork, you're free to change your mind.
It's not final
Even if you're pre-approved, you may not end up with the loan. Lenders require successful appraisals and other steps be completed before they'll write you a check. If you're denied a mortgage loan, talk with your lender to understand why. Federal law requires the lender to tell you in writing the specific reasons for the denial. You may be able to fix the problems and get the loan or at the very least prevent the same problem from happening next time.
Don't rush it
A real estate deal can fall apart at many points during the transaction, and you can't prevent them all. However, securing financing is a common problem and in some cases an easy one to fix, if you start early. Lenders need time to examine your application and process any commitment. Therefore, start early. Get pre-approved, and you'll be much closer to securing a mortgage loan when you find the house you want to buy.
For more advice about getting financing for your home purchase, talk to your Realtor.
Whether you're interested in buying your first home, your next home, or just want to know more about home-ownership in general, I encourage you to check out a couple of great online resources: http://www.texasrealestate.com/ or http://www.har.com/ and for all of your Pearland TX and Northern Brazoria and Galveston County real estate needs, please visit my site at http://www.danfrankrealty.com. All of these sites offer tons of useful, real estate-related information geared specifically for Texans.
Danny Frank is a local Pearland TX Real Estate expert
This column was published in the 31Aug08 edition of the Galveston County Daily News