He's a young police officer with a stable job, healthy savings account and a strong desire to take advantage of the current buyer's market to purchase his first home. Yet he's puzzled and intimidated by the home buying process. Where to begin?
The police officer's first step should be to sit down with a mortgage lender for a preliminary idea of his borrowing capacity, real estate experts say. Known in the industry as a "prequalification session," or "prequal" for short, such a meeting can save time and spare the buyer the disappointment of picking out a property above his range.
"The danger is if you go looking around first at properties, you're going to fall in love with a five-bedroom mansion when all you probably can afford is a starter home. Why break your own heart?" said Paul Havemann, a vice president at HSH Associates, a mortgage publishing company based in Butler, N.J.
The prequalification process shows you the field in which you can play ball and gives you estimates of down payment and closing costs under a variety of mortgage options. Sitting down with the lender, you can calmly compare an adjustable-rate mortgage with a fixed-rate mortgage, for instance.
"Prequalification allows you to know the rules up front so you won't get your heart set on a house you can't afford," said Peggy Rhodes, a vice president at Loyola Federal, a Baltimore-based savings and loan.
Not only will prequalification give you an accurate sense of your borrowing capacity (subject to changes in rates and terms), it will also give you a basic grasp of housing finance generally, including key terminology.
Most lenders will give you booklets on subjects ranging from federal mortgage disclosure to underwriting guidelines, the basis on which loan decisions are made. As you talk to the lender and read what he's given you, your feeling of intimidation will melt away. This will let you move into the home buying process with more confidence.
Prequalification can also allow you to remove obstacles to your home purchase at an early stage. It can add urgency to your need to accumulate cash through a crash savings program. By bringing your home buying goal in focus, it should give you more motivation to save.
In addition, errors in your credit reports will often turn up during this process, allowing you the time to gain corrections from the credit agency to put you back in good standing.
"Studies show that there are lots of errors on credit reports, and if your name is John Smith you'll probably have problems for sure," Havemann said, cautioning that it can take several months to resolve a credit problem.
Becoming prequalified for a mortgage can also give you negotiating power when it comes to making a contract offer on a property, said Peter G. Miller, author of a new book titled "Buy Your First Home Now," published by HarperCollins Publishers.
"The advantage is that if you walk in to negotiate with the seller, you have tremendous leverage because there's no question about your ability to afford the property. If the choice is between your offer and someone whose financial arrangements are unknown, the seller will prefer your offer."
Negotiating from a position of strength is always preferable, even in a buyer's market where there may be few other contenders for the property. It can influence the price at which you buy as well as other terms.
You will probably want to select a lender or lenders to prequalify you on the basis of their mortgage rates and referrals from friends and acquaintances. Then it's probably best to set an appointment to meet with the lender in person rather than attempting to do the prequalification interview by telephone.