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What’s First? The House or the Mortgage?
by Dean Hartman on October 20, 2011
 Most people get it backwards. They shop for a home, THEN, they try to structure the financing for it. They make the emotional decision of buying the home of their dreams, THEN, try to apply logic in how they pay for it. Many even go “online” and play with what is affordable by underwriting standards without TRULY considering their future.
I am always fascinated by mortgage underwriting “standards” when they don’t even take into account some very large variables that affect an applicant’s cash flow, and thereby, their ability to repay the loan or maintain a lifestyle they want:
- Are you single or a family of six? Costs for food and clothing alone are very different.
- Do you live in a state that requires State Income Tax or not? Another significant part of the equation.
- How often do you like to eat out or vacation? Are you willing to sacrifice these things for a bigger or nicer home?
Falling in love with a home without considering the REAL impact on your lifestyle is a recipe for unhappiness….either in re-adjusting to a “lesser” home or disappointment over the lack of vacations or nights out.
My advice is to first work on your financing. Go the logic route. Find out what you can afford from a lender’s underwriting perspective, but then, spend some time considering the the cash flow realities of your choice. Work with your loan officer to make wise choices.
Additionally, your loan officer should be advising you on ways to properly represent and transfer your assets, how to explain and document your income, as well as, assisting you in methods to get your optimal credit score. This counsel can be invaluable in smoothing out some of the bumps in the mortgage process, besides giving you the best chance to get the most aggressive pricing available.
To me, the choice is crystal clear…the mortgage before the house!
Remember, Funding First! Even if you're going to pay cash you will need your source of funds verified and ready for your use. All offers to purchase these days require proof of funding, whether it's a pre-approval letter from a lender, or a "cash avaialble" letter from an account manager, or an account statement from a liquid cash account.
Many cash buyers are finding it advantageous to purchase with cash then refinance. Cash offers are generally much stronger than offers contingent on financing. Refinancing is generally much easier and quicker than funding a purchase. Savy buyers secure the best deals with cash then refinance at amazingly low rates to recover thier funds. So even if you plan to buy with cash, talk to a mortgage lender about refinance options.
I've seen too many clients miss a great opportunity because they did not have their funding lined up before they tried to buy. The best deals go quick. Be funded and be ready!
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