Why you should get pre-approved for a mortgage before starting your property search.
By Heather Chilvers - Sales Representative, Coldwell Banker Bermuda Realty
Many Real Estate agents suggest that buyers should be pre-approved before they start their property search – here Heather Chilvers at Coldwell Banker Bermuda Realty examines why this is the case and how you should go about getting pre-approved.
Many people do not have any sound basis on which to base the price range in which they can search for property. Unfortunately, often the tendency is to think they can afford a little more than they actually can. Thus, resulting in their looking at some beautiful properties, only to be disappointed because they then discover they cannot afford them.
By getting pre-approved you know your financial perimeters. Actually when you make an offer, it will be much stronger when presented together with a letter that says you have gone to the time and trouble to research the financial side of things with your bank. More importantly it tells the Seller and the Agent that you are serious. Any savvy seller will require a pre-approval with an offer and many sellers require pre-approval before showings.
Typically a seller goes to a lot of time and sometimes expense in order to get their property ready for showing (particularly if they have small children). Often the seller will spend a couple of hours or more prepping the house (mowing the grass, cleaning the kitchen and bathrooms, tidying the family room etc.). A showing doesn’t just take the 15/20 minutes or so of your time to view it. The Agent has to make arrangements, notify tenants, sometimes collect keys from elsewhere, allow travel time, arrive early to open up the house and stay afterwards to ensure all lights are off and the house and pets are secure.
It is difficult for all parties to justify the time and money involved for someone who hasn’t even been pre-approved, and really doesn’t know whether they are in a position to buy or not.
Since the peak of the market about 7 or 8 years ago, banks have been extremely cautious about how much they lend, on what they lend and the risk attached to whom they lend.
PREPARING FOR PRE-APPROVAL
The lending institutions will require disclosure and verification of the following before processing your application:
1. Completed application (one for each back if going to multiple companies)
2. Letter or contract from current employer and pay stubs/statements to verify income
3. If self-employed: Payroll Tax Returns from the last 12 months or 2 years financial statements
4. Valid photo ID (passport, Bermuda driver’s license)
5. Copy of a rental agreement if rental income is being received on an existing property and statements to verify income received.
6. All income should be included.
The pre-approval process can take as long as six or seven weeks, particularly if you are not able to provide the bank with the items outlined above in a timely manner.
If you wish to purchase a home you need to be aware of the following:
1. You will be required to verify that you have in savings, the required down payment (25%) of the cost of the house plus a bank appraisal plus half the legal fees and stamp duty on the conveyance, plus the finders fee for the bank mortgage, plus the costs of stamp duties and legal fees associated with the mortgage documents. On a house which costs $850,000 this translates into about $238,059 and must be confirmed by yourselves to the lending institution prior to issuance of pre-approval letter.
2. The pre-approval letter stating the amount the bank is willing to lend is usually only valid for 90 days
3. To extend the pre-approval your (the applicant’s) details must be re-verified.
4. The final mortgage amount offered will be based on your LTV (loan to value ratio) .i.e. How much you earn compared to how much you will pay per month in loan payments. Usually the banks will not go over a maximum of 50% of your combined salaries. If you have credit cards and/or other loans say for schooling, college funds for the children, car, boat, etc. This will be calculated into your loan to value risk profile. Some people have no idea how much a loan of say $600,000 over 25 years calculates into on a monthly basis. Your banker or your real estate agent can help you with this.
Typically mortgages are only offered to applicants between 18 – 65 years old (65 is the maximum age for the end of the mortgage term). The Mortgage Term – has a maximum 30 years (based age and ability to repay). Interest rates can be fixed or variable and can vary from one lending institution to another.
Mortgage funds will only be released upon the bank’s receipt of:
a) A Signed Sales and Purchase Agreement for the property.
b) A Copy of Home Insurance Policy for the property.
Without doubt having a pre-approval letter prepares you mentally and financially towards achieving your goals, and puts you in a much stronger position when making an offer than someone who does not have one. Sometimes being pre-approved is the only difference between getting your Dream Home or losing it to someone else.
Happy House Hunting!
Heather Chilvers is amongst Coldwell banker Bermuda Realty’s Leading Sales Representatives. She has been working in Real Estate for 25 years. If you have a question for Heather, please contact her at firstname.lastname@example.org or 332 1793. All questions will be treated in confidence.