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Buying for Buyers: First Things First (Step #1)
May 10, 2010 - Dylan Renz
For most of us, buying real estate is not something we do many times in our lives and the process is something that many people find confusing, even if they have done it before. My next few posts will be a part of a series called Buying for Buyers which will try and the buying process.
Step #1: First Things First
The first thing you need to do when you begin the process of buying a house is figure out how you are going to pay for it.
Most buyers need to finance a home and there are a few things that need to be taken into consideration.
First, knowing how much you can afford before you begin searching for a home seems obvious, but I have seen too many buyers make this mistake. There are a lot of factors that go into determining what you can afford. Monthly payments, taxes and insurance, closing costs, required down payments, and credit history just to name a few. The only way to ensure that you know exactly what you can afford to borrow is to sit down with a bank or mortgage lender.
Second, knowing who you are going to borrow from is also important before you make an offer on a home. Contracts are written with very specific deadlines. The standard for making application for financing is five days and the standard for receiving loan approval is 30 days. This does not leave a lot of time for buyers to be shopping around for financing once a contract is in place.
Finally, make sure you have the bank write you a pre-approval or pre-qualification letter. While it is not always required, most sellers want to know that you are going to be able to get the financing for the property before they agree to take it off the market. If there are multiple offers on a home, this can be the deciding factor. Also, if you are looking to buy a short sale or foreclosure property the bank will often not even review an offer without a pre-approval letter attached.
Even if you are going to pay cash there are a few things you need to consider.
First, know how much you are willing and able to spend and be sure that you take into consideration additional expenses such as closing costs, inspections, etc. If you have exactly $150,000 to spend you can not buy a property for $150,000.
Second, it is important that you also make sure you know where the cash is and how long it will take before it can be made available. You most likely don't have the total amount sitting in a checking account and it can take time to pull money from one investment account or another. This is going to be vital information when making an offer and selecting a closing date. Also, keep in mind that you will need some cash up front in order to make an good faith deposit.
Finally, have your bank complete a Proof of Funds letter. This is simply a letter stating that you have the cash necessary to purchase a property. You will determine how much the letter should state is available. For example, if you are looking to buy a property for $50,000 your letter would state that you have $50,000 available, even if you had $800,000. This is something that is often required when making a cash offer, especially if the property is a short sale or foreclosure.
Taking the time to deal with the financing first will save you a lot of time a trouble in the long run.
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