In the Bay Area, most people recommend that buyers get pre-approved before they even start hunting for a house. I think a big part of the reason why is because housing is (still) incredibly expensive here. Going through this process serves as a reality check early on. It would really suck to spend months finding the right property, go through the hassle of negotiating a great price, only to find out that nobody will lend you money to close the deal.
A pre-approval means that you go through all the steps you would take when actually applying for a loan. The lender will pull your credit, verify your assets and income, and see whether you can afford the loan. If you pass all these tests, they give you the thumbs-up in the form of a pre-approval letter. You can show this to potential agents (it shows you're a serious buyer) and sellers (it shows that you can close the deal).
There are some disadvantages to pre-approval:
- Because the lender is checking your credit, it counts as a loan application to your credit score. As a result, your credit will drop. I'm not sure yet how by much.
- There can be some fees involved (more on this later).
- It's relatively time-consuming.
- A pre-approval is only "good" for a certain period of time, typically 3 months or so. You'll need to re-pre-apply to extend it.
If you aren't planning on buying in the near future (for example, you might be thinking of buying between 1 and 2 years from now), it may make more sense to get pre-qualified. Pre-qualification involves you telling a lender how much you have, how much you make, etc., and then having them tell you how much they would be willing to lend you. Importantly, the lender in this case does not verify what you've told them. As a result, it's considered weaker than a pre-approval. It won't carry the same weight with a buyer, but it could be a useful tool for estimating how much you can afford.
An important note: as people keep on saying, only YOU can REALLY know how much you can afford. The lender may estimate that you can pay, say, up to $2000 a month on your mortgage, but they don't know what your lifestyle is or what other non-loan obligations you have. I'm trying to play it conservatively, resisting the temptation to lend as much as I can possibly get, and instead making sure that I can comfortably maintain my lifestyle even in a new place.
Anyways. You can get pre-approved from any place where you would get an actual loan. I decided that I would scope out a few representative samples from different classes of lenders (local banks, national banks, credit unions), except for mortgage brokers. I'll admit that I've been a little worried by the stories I've heard of hard-riding mortgage brokers... even if they didn't act unethically like many did during the boom years, their incentive structure pushes them to lead people into the loans that give them the best profits, which aren't necessarily the best loans for me. My plan has been to get pre-approved by a more conventional lender, and then when the time comes to actually apply for a loan on a specific property, I'll use that lender's rates to shop around the mortgage brokers to see if any of them actually can get me an absolutely better deal.
Now, theoretically, I could just pick any old bank or whatever to get pre-approved. I decided, though, that I wanted to get pre-approved with the lender that I'd be most likely to actually use... it seemed like a good idea to get comfortable with them, experience the process the way they did it, and hopefully cut down on the volume of work that I'd need to do when the real deal came along. So, in essence, I started doing the process of applying for a loan, just half a year before I find a condo.
To make a real apples-to-apples comparison, you need to contact all prospective lenders on the same day - rates fluctuate on a daily basis, or even more often. So I spent some time collecting prospective lenders. This mainly involved Google searches and Google maps, along with a few things that just occurred to me. My final set of candidates was:
Credit Unions
Provident Credit Union
San Mateo Credit Union
Technology Credit Union (disqualified since they currently don't make condo loans)
Regional Banks
First Republic
California Bank & Trust
Union Bank of California
Borel Private Bank & Trust
National Banks
Wells Fargo
Chase
Fortunately, most banks have online forms that you can fill out to get customized rate quotes. This is much better than a static web page, which probably just lists the most common rates (likely the 15 and 30 year fixed for SFDs). The web sites should also show what your closing costs can be, which vary drastically - even at 0 points, they varied from about $2000 to more than $7000. So don't just look at the rate - the closing costs can drastically raise the total price. This is to some extent reflected in the APR, as opposed to the rate, but the translation is complicated... if you divide the closing costs over 30 years of the loan, it may look reasonable, but if you sell in 5 years, it will look much worse.
I compared all the rates I could get within 1 day. I found that the credit unions were the cheapest. Some regional banks were nearly as good, while others had the highest rates of all. The national banks tended to be high. I checked again about 10 days later, this time just focusing on the top contenders from the first round. In both cases, San Mateo Credit Union had the best rate AND the best closing costs. I decided to make my move.
I'm not a member of SMCU, but I am a big fan of credit unions - I've belonged to one particular credit union for over a decade, and have been extremely pleased at their service. SMCU has a web portal that you can use to apply for pre-approval. This appears to be a service that they've acquired, rather than something built in-house, because Provident Credit Union seems to have the same system.
The online application was pretty good to use. There are really helpful FAQs that display while you're filling it out. It lets you save your progress and return later, which is great - it takes time to fill out, and I needed to occasionally wait so I could look up an old pay stub or something. One thing that confused me a little bit was a by-product of the fact that the exact same form is used for pre-approval as for regular approval. Based on what I had read, I had imagined that I would just supply my financial data, and it would spit out a number for me. Instead, they wanted to know how much the property would be worth and what size of a down payment I would make on it. I put in a number that I considered to be at the high end of what I would spend. Then I filled out the remainder of the form, including all my assets. Then I went back and adjusted downward my down payment and purchase price. I'd realized that my documented assets would just barely cover the down payment and closing costs, not leaving any cushion for reserves. In practice, I would be OK with this - I have funds in retirement accounts and personal stocks and such that I could tap for reserves in an emergency - but I knew that I didn't want to stretch that far, and in any case, I was started to get worried and confused about the whole pre-approval process. Would they give me the "magic number", in which case it didn't matter what I put down here? Or would they only give me a thumbs-up or thumbs-down, in which case I'd want to be careful to ensure that I selected a reasonable value?
After a couple of days, it was all filled out and ready to go. I was surprised to note that Firefox, which had been great up until now, wasn't working on the page where I was supposed to read and acknowledge all their disclosures. Or, to be more accurate, their site wasn't working right. I viewed the page source and checked out the javascript, for old time's sake. My hunch is that they hadn't re-worked it yet for Firefox 3, which probably has a different ECMAScript engine. Anyways, I had to wait a while longer, then I did it again in Safari, and this time it went through.
At the start of the process, the page had said that they use an automated underwriting system that is capable of making many decisions automatically online, in which case they would just produce a pre-approval letter that I could print. They also warned that in some cases, their system can't handle it, and a person needs to finalize it. I fell into the second category. They gave a nice, descriptive message, and told me to expect a call soon.
I was contacted the next Tuesday by SMCU. She noticed that I wasn't an SMCU member and said that I'd need to join. I'd been surprised before that they didn't ask about this in the online form. The entrance requirements for SMCU are stricter than for Provident, and while I knew what I'd need to do to join, I hadn't wanted to set up an account until I was sure I'd be going with them. In the back of my mind, I thought that since I was applying for a property in San Mateo County, that would make me eligible right away. That isn't the case. We chatted about that a little, and I filled out an application and sent it in.
She also asked me to send in some documentation. I'm still not totally clear on the automated underwriting system, but I suspect that for borrowers getting very conventional loans with very high credit scores, those borrowers are statistically far more likely to be financially sound, and so those people wouldn't need to furnish actual proof of their finances. For whatever reason, I didn't fall into that category - I suspect that it has become much harder since the credit bubble burst. She asked me to send in my previous 2 years W2s, my 2 most recent pay stubs, and the most recent bank statements from the accounts I'd be tapping for my down payment. I also needed to sign several forms - one acknowledging my right to a copy of any appraisal report, another authorizing anyone to release my financial info to SMCU, and a copy of the Fair Lending Notice.
I'm Generation Y (or whatever they're calling us now), and do everything online. I've long stopped receiving paper copies of bank statements, bills, and so on. I hoped that printouts for everything (including my pay stubs) would be acceptable. They were.
She also asked me to send in a $275 good faith deposit. That threw me for a loop. In all the dozens of books and articles I'd read advising my to get pre-approved, none of them had mentioned that you'd need to pay hundreds of dollars for it. In fact, many touted the fact that it was free. We went back and forth on this a little bit until I understood it. It wasn't an application fee - they wouldn't cash it, and would just hold it until an eventual application. If I ended up deciding not to buy a property or went with another lender, I'd get it back, minus a $10 charge for a credit check. That seemed way more reasonable. Also, she clarified that I would still be free to apply for a slightly different form of mortgage - even though I applied for a 0-point version, I'll probably try and buy a discount point if I can on the actual property.
Everything was kind of staggered - I gathered the documentation, signed the forms, and faxed everything in the next week. I also mailed in the check around the same time. Then I played the waiting game. Then I played Hungry Hungry Hippos.
Finally, a call at work: my mortgage was approved! I felt very happy. She asked if I would like her to mail me the pre-approval letter; I said yes. She reminded me that I still needed to become a SMCU member and send in the good faith deposit; I told her that both were already on their way.
I got the actual pre-approval letter in the mail the next day. It looks like they didn't need to wait for my check or membership to issue it, although both would be required to actually apply for the loan. It's a simple, one-page document that lists the type of loan and the amount. Interestingly, it just listed the loan amount, not the purchase amount, which means that buyers would need to trust that I do actually have the down payment for cash that I said I did. Also, I was disappointed to see that the letter was for the exact amount that I had put down in my application. I had really hoped that they would calculate an upper maximum for me, but it looks like they just run the numbers for what you submit. If I had realized that, I would probably have tried for the original, higher amount that I was considering, just since it feels like that's probably closer to my maximum.
This letter is good for 60 days, so it will certainly expire before I buy a property. Depending on the status of my search, I might renew when it expires, or may wait a bit longer until I'm closer to searching in earnest. The next time, I'll almost certainly put in the higher amount... not that I'm planning on borrowing more, but that should let me know just how much flexibility I have, and may reassure sellers about my resources.
All in all, it's been a good experience. I've definitely learned a lot - going through this process is quite a bit different from the breezy paragraph-long exhortations that everyone writes about. Most importantly, I feel like I now have an actual, official green light to move forward with condo capture.
No comments:
Post a Comment