When preparing to buy a house, most people start with a real estate agent. That seems to be the correct first step — after all, it's a house you want to buy — but it's not. A house may be something you want, but you're not going to get it without a mortgage. Therefore, you should talk first with a lender, not a real estate broker, and see about getting a pre-approved mortgage.
Most banks offer loans, and going to them is like shopping at a Ford dealer: You won't get a Chevy, no matter how good the Chevy might be. Therefore, you need to compare offers from several banks.
Or you can work with a mortgage broker. Brokers represent dozens of banks. Although the broker serves as middleman, his or her services will not cost you anything extra. That's because brokers get loans at wholesale rates, and pass them along to their clients at retail prices, just like any business.
The difference between wholesale and retail is how brokers make money. Therefore, you get the same rate from a broker as if you went directly to the lender yourself. In fact, because of their volume, many brokers are able to offer their clients better deals than you can get by talking to banks on your own.
The choice is yours.
But why bother looking for a house if you don't know whether you can get a mortgage, or how much of a loan you can get? After all, your mortgage will determine how expensive a house you can buy. Many real estate agents, in fact, will not work with a client until after they've been approved by a lender.
With that being said, here are three advantages of a pre-approved mortgage.
You Avoid Disappointment
There's nothing worse than finding the home of your dreams, only to discover later that you can't afford it. By going to the lender first, you'll determine how much house you can buy before you start visiting homes beyond your price range.
You Save Significant Amounts of Time
While you're searching for a home, the mortgage application process can be underway. Too often, people start this process only after they spend three months finding the home they want. This forces them to spend another three months waiting for their loan's approval. Starting the loan process now will save you a lot of time.
A Pre-Approved Mortgage Can Be a Major Negotiating Weapon
With a pre-approval letter in hand, you can complete the purchase of a home in as little as 30 days, instead of the usual three months. Many sellers are in a hurry to sell and will accept a lower offer in exchange for a quicker settlement. If two people bid on the same house, the person with a pre-approved mortgage will win the contract.
So choose your mortgage company first, get the pre-approved mortgage, and then hire a real estate agent.
Originally published in The Truth About Money