Should I Buy A Home? Part 2: Process
Continued from Part 1: Preparation
I am considering buying a home, although I have not made up my mind on the subject. This is not due to indecision, but rather due to a lack of necessary information. There are many factors to be considered in my case, and in order for me to make an informed decision about buying, I need to solve for several variables involving cost.
My questions to you involve what steps I can take to solve those variables. Should I begin with a pre-qualification or loan approval? Will a lender invest time and resources in me when I have no specific property in mind, and I may ultimately decide to continue renting? Should I start by speaking with realtors in order to guage what is available in my price range? Will realtors invest time and resources in me when I have no loan arranged and I may ultimately decide to continue renting?
Also, what is the proper sequence of action for someone who is seeking to collect all the relevant information in order to make reasoned decisions about buying a home?
Well, as I said in Part I, a major question is whether you can trust real estate agents to answer the question honestly. Some will, most won't. If they tell you to buy, they make money. If they tell you to keep renting, they don't. Mind you, if you can afford to buy, the numbers are overwhelmingly in favor of that, as we'll see in Part 3. Nonetheless, one trusts that you see the potential for abuse.
Nobody should have a specific property in mind when they first approach an agent. Smart buyers won't make an offer without looking at a certain number of properties first. The only exception is if you're buying the old family home from your parents or something. You've agreed on the price, and the terms, and now you're going to pay an agent to make sure all the paperwork is done and filed correctly and the inspections are done and all of that sort of stuff. This is a smart thing to do, by the way, but most people in this kind of transaction seem determined to save money when a low percentage agent's fee or some flat fee would be an astoundingly good investment.
You needn't worry about whether lenders and agents will "invest time in you." Those who are unwilling to spend time on you in such circumstances should be avoided. Yes, I want my time to be spent on people who really want to buy and are capable of buying, which is why a basic prequalification is among the first things I usually do. I don't want to waste your time showing you stuff you can't, or shouldn't, afford any more than I want to waste my own. But there's a lot you can do to qualify yourself, so that you know how strongly you're inclined to buy, and approximately how expensive a property. This way, you know that the agent or lender isn't leading you down the primrose path with properties you cannot really afford. This is a severe problem right now, especially in expensive areas. I've said it before and I'll say it again. You need to know how much house you can really afford in a sustainable situation, and you have to make certain your agent knows and sticks within your budget. The one who shows you the five bedroom house, when you can really only afford the three bedroom condo, is not your friend. I'd fire such an agent the first time they showed you something you could not reasonably get for your known housing budget (which is one reason I recommend against Exclusive Buyer's Agent Agreements, and don't ask for them unless I'm giving clients something beyond MLS listings for their exclusive commitment). The agent who shows you the three bedroom condo you really can afford when everybody else is showing you the five bedroom house you can't, is your friend, whether the "Oooohhh" factor is there or not, and even if the "Eeewww!" factor is there. Curb appeal is how sellers sucker buyers (and yes, when I'm a listing agent I'll help you with that in every way I can. It's the most important part of my job to help my client get the best deal they can. But right now I've got my buyer's agent hat on, and my job is to help buyers see the diamonds in the rough and not pay more than they're worth).
Once you've done your self-qualification, that's when I'd go find a real estate agent. I wouldn't worry about an actual lender's prequalification as long as you know what your credit score is. A good agent is going to do a prequalification anyway, and if they're a loan officer as well, they'll set you up there. An agent who doesn't do loans should be able to provide recommendations for someone to do the prequalification, and if they don't recommend the same loan provider for the loan as did the prequalification, I'd go back and check with the provider who did the prequalification anyway, as well as finding other prospective loan providers, not to mention pointedly not accepting the new recommendation for a loan provider. Despite the fact that I'm a loan officer who also does real estate, I'm not sure I'd trust a real estate agent with my only loan application. I came to being an actual real estate agent from being a loan officer for several years first - and then I went and learned how to do real estate. The average real estate agent who does loans never spent an apprenticeship doing loans, never learned the ins and outs, and has no clue whether they can deliver what they put on the Mortgage Loan Disclosure Statement (California's replacement for the federal Good Faith Estimate). They just figure "It's the same license, so I can, and it's an easy way to earn a lot more money from the same clients!" They don't really know loans, they've just figured out that it's a way to make more money. Furthermore, there are too many shady personalities out there, and way too many real estate agents think they know how to do loans but don't. There are a fair number of crooks and incompetents and just plain gladhanders, who only care about whether they're getting a commission on this particular offer, out there, but most of what I do as a real estate agent can be plainly seen and understood by my clients. What a loan officer does is much less transparent to even the most sophisticated borrowers until it is too late to change to another provider. I've seen way too many people burned by only applying for a loan with one provider. I've only ever not been able to do one loan on the terms quoted and locked (and I did my darnedest to help the provider who could, where most loan providers in my shoes would have obstructed to the best of their ability, as I've also learned by bitter experience), but I've seen a lot of people who applied with the loan provider who talked a better deal but who couldn't deliver any loan at all, much less the one they talked about. Many times they have come back to me in desperation two days before escrow expires, or seven days after it was supposed to expire, and I can't always help them in time then. Always apply for a back up loan, especially if it's for a purchase.
Take any newspaper advertisements you see about rate, however, with great heaping cargo ships full of salt. I'll cover what's really available later on, but for now what you need to know is that loan companies advertise with teasers like Negative Amortization Loans and short term ARMs and hybrid ARMs that takes five points to buy the rate and you still won't get it when it comes time to sign the final papers. The whole idea is to get you to call, so that they can get you to sign up, and when they deliver something different at the end of the process, your choices are poor and their accountability is practically nonexistent. I don't think I've ever seen a real rate on a real loan that I would be willing to get for myself advertised anywhere, in any medium. Even the so-called "best rate" websites and newsletters are notorious for cheating. I've gone right down the line calling them and asking about loans that were supposedly the standards they were quoting to, and gotten not one answer that was within half a percent of the rate quoted on the website or in the newsletter. Nor were any of the websites or newsletters I've complained to (or my company complained to, when I worked for an internet lender that was signed up with them) interested in enforcing the rules. I don't know one single loan provider who advertises actual rates that they can actually deliver anywhere. Those few companies who are actually willing to do it have all quit advertising in disgust and gone to finding clients in other ways.
Continued in Part 3: Consequences
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