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Get A Loan Before Starting With Your Property Search
There are pros and cons for every action you take.
But when it comes to buying real estate, getting a loan approved beforehand has much more pros compared to the cons. You are not buying groceries from the supermarket which contains products that you just know you can afford.
A house is something that can run up to millions of dollars.
In view of that, wouldn’t it be good hindsight to see whether you will be able to obtain the financing required to make such a huge purchase?
That is, unless you are buying in cash. If that is the case, you do not need to read this article at all.
The first advantage of getting a loan approved beforehand is that your real estate agent will take you more seriously as he now knows you have the resources to make an instant purchase decision.
When you are competing with another buyer for an apartment unit, who do you think a seller will sell to if both offers are the same?
The buyer who has financing ready to go or the other buyer who has absolutely no idea whether he is able to finance it?
The answer is pretty obvious.
When we talk about pre-approvals and approval in principles, the terms “prequalified” and “pre-approved” often get confused. You are not to blame.
Prequalification is simply a process where a lender or mortgage broker ask you a series of questions to judge whether you are able to obtain the loan you want. This is just an assessment and there is no firm offer on the table for you.
Pre-approval is a different monster altogether. This process means that you have properly applied for a loan and it was approved after going through the usual procedures of credit assessment, stress tests, debt ratio calculations, income calculations, etc.
With supporting documents to verify your details, a lender has the confidence to give you a proper approval which you can exercise within a specified period. A formal letter of approval usually accompanies it.
The main advantages of getting your finances up to speed before you commit to buying a house cannot be questioned.
A seller will feel more comfortable dealing with a buyer who is serious enough to have already done all the leg-work. You will also be able to focus on the types of properties you can realistically afford.
Saving both your time and your agent’s time.
Completing the transaction will be smoother as you do not have to go through the long wait with the anxiety of worrying whether you will get approved or not. You will also not face a rush for time and end up accepting a mortgage that is detrimental to you.
One thing that has home seekers worrying about getting loans beforehand is whether they are obligated to take them up.
You can be assured that you are not obligated to accept anything. You are always free to search the market for better interest rates or better mortgage terms that suit you.
A preapproval is a timesaver rather than a timewaster.
If you really cannot afford the time to get an application in, at the very least, get a prequalification.
The next question is… whether you should go for maximum or minimum leverage?
Maximum Or Minimum Leverage?
Each individual will have his or her own level of risk tolerance.
There are people who cannot handle the pressure of just a little risk. Then there are others who find a sense of thrill in taking risks.
While taking on higher risks usually means a potential of higher rewards, be mindful that that is just a theory instead of a principle.
An investment has to come through for anyone to see it’s potential returns. And if you have to take on so much risk that it affects your relationship with the people around you, you have to re-think whether it is worth it in the first place.
Risk adverse individuals usually are the ones who see a house as a home. Risk takers might see a house as just another investment vehicle.
This difference in mindset plays a big role in one’s decision to take up maximum or minimum leverage.
But whether you like it or not, your decisions on mortgage will affect you financially whether you see it as a home or an investment vehicle.
For those who takes on minimum loan to purchase a house. They could end up buying smaller houses.
But when their income rises, or with a couple of new additional member to the family, they would be looking at bigger houses.
This compounds your workload and closing costs.
But if you are to take up maximum leverage to buy a house in the first place in preparation for the future, you could save yourself all the hassle of house hunting again. Even if you wish to invest in a second property, you can consider the option of using home equity to make those investments.
There are pros and cons for both taking on huge or little leverage.
It is your decision to make.
However, remember that your family is at the mercy of your decision. So it could be a better idea to put your family first by viewing a house as a home.
If everything falls nicely into place, only then should you look at the investment aspect of it.
If you are a risk-taker, overstretching yourself for a house you cannot afford puts your financial position in jeopardy.
Many times, home buyers go for the best views, with the most rooms and washrooms. Then they incorporate expensive interior design without taking 2 minutes to think about the financial aspects of these decisions.
In this instance, even though you are putting your family’s interest as a priority, your decision could cause them hardship in future should you default on your mortgage.
If you are a risk adverse person, take note of why you want to pay up so much cash for down payment in the first place.
Because if there are good investment opportunities in the market with a return that is greater than the interest rate on your mortgage, it could be a better move to take on a much bigger loan and use your excess cash on those other investments.
There are of course other reasons why someone would want to take a huge or small loan.
For example, those preferring a smaller monthly payment, they can either take a small loan, or a big one with a longer loan period. Whereas some people are just not into the idea of getting into debt.
When this is the case, you would want to take on as little loan as possible in as short a period as possible. Even pay off the debt in lump sums when you obtain a cash windfall.
There is no right or wrong answer on the question of how much leverage is best.
The solution is unique for each individual as it depends on their own personal situation, risk tolerance level, and financial goals.
Make your decision a smart one.