Not quite yet.
You need to decide two important factors before you get much deeper into this process. The second is about loans to which the rest of this chapter is dedicated. The first is whether you want to be represented by a person who works in real estate. There is great mystery surrounding these folks and Checklist One at the end of this book will help you cut through that.
Here is a profile of the larger group we will call “licensees.” They are typically not the main wage earners in their family. Some will have pensions or pensioner’s checks to fall back on if the real estate career is not going well. They are required to pass a state exam that includes a lot of real estate law, some ethics discussions couched in law, and some legal paperwork. If they pass, as some 50% do, they become licensees.
If they join a big office with a national company they will get additional training in sales and prospecting. Big offices are good in this arena. Some agents outgrow their need for this kind of environment and start their own offices. They are experienced agents and real professionals in many cases.
And if they join their local Association of Realtors they automatically become members of the State and National Associations and get to use the title Realtor, which is a registered trademark. They will take more courses on ethics. They may further their knowledge through the Association’s educational programs by obtaining official Designations like GRI, CRS, SFR, E-Pro, ABR, ABRM, GREEN and SRES, just to name a few. All of this is good and makes for a better professional.
However, it is really experience that counts. How much business have they done, recently? When I first got into the industry in the early 1990’s the average licensee in a major office was doing 1.7 transactions per year. That really isn’t enough to gain much experience. You want someone that is doing 5-10 transactions a year on their own, or more if they are part of a team. And you certainly don’t want the new junior member of the team to do your negotiating for you with only a couple of transactions under their belt.
Use Checklist One to help you decide who to use. Don’t be bashful. This is the largest transaction you are going to be involved in so far in your life and you deserve to know the answers. You want someone that is tough enough to take the questions in the right light but smart enough to leave you in control and listen to what you have to say. You are buying the home, not the agent!
You may have noticed we are still not even talking about looking for a home yet. Here is why. There are two bad things that can happen to you when things are done out of order. If you do not get pre-approved for a loan (notice I didn’t say pre-qualified) you may fall in love with a property and then find out you can’t afford it. That is bad. Perhaps even worse, you might settle for a home that is less than you could afford. You could have done better if you had known you could afford it. So before you go to the market, apply for a loan, do the full process and get a pre-approval letter from the lender. This will be particularly valuable, as you will see shortly.
Now lenders will qualify you up to a certain level. They call this your Ratios. The first ratio is what your home will cost compared to your income. If the principal pay back on the loan, the interest on that loan, the taxes, and the insurance come to $1,500 per month and your income is $4,500 then the ratio is 30%. This is called PITI by the lending folks (Principal, Interest, Taxes, Insurance). If you are in a Homeowners Association then the HOA dues will have to be added in as well, though the insurance part is included in those dues.
The second ratio is the PITI plus any other debts and monthly obligations that you have including: student loans, car loans, alimony, child support, credit card payments, any other debts or obligations. If your home is $1,500 and you have a $300 car payment and a student loan payment of $150 and credit card minimums of $250, and child support for $425 then your second ratio is $2,625 divided by your income of $4,500 or 58%.
So your total would be 30/58. Even though you were fine on the debt for the home, the other debts kicked you over the line of acceptable total monthly obligations and you would not qualify for a loan.
Let me be real clear about this. My wife and I were at 55% at one point in our lives and all we did was argue about money. It was miserable. A loan officer might get you qualified by cooking the books, but if your real debt is more than 50% you are going to be very uncomfortable and probably not enjoy your home very much. Your home owns you, not you owning the home.
Look at your lifestyle and decide what homeownership responsibilities will do to change that financially. Then be honest with yourself about whether that will make you happy.
Let’s simplify your understanding of the players. Most Loan Officers are the Yes people. “We can get it done!” is their action phrase. And then along came …
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