Q: Before I meet with an exclusive buyer’s agent or check out homes, should I get pre-approved for the maximum amount or for the price range I’m interested in purchasing?
I spoke with the exclusive buyer’s agent I’m thinking about using yesterday and he told me not to get preapproved for the amount I’m thinking about offering, but to go ahead and get preapproved for the maximum amount.
My only concern is that if the buyer’s agent shows the listing agent my pre-approval letter noting the maximum amount the lender is willing to finance, I think it will eliminate my leverage when it comes time to negotiate with the seller.
Anyway, my gut is telling me that the buyer’s agent is looking to get the highest amount for the property, thus a higher commission. What are your thoughts?
A: Real estate attorneys confirm that brokers are including preapproval letters along with purchase contracts. So you’re right to be concerned. But I think there is a relatively easy way to get around this problem.
But first, in general, I don’t think you should tell anyone how much money your lender has agreed to finance for you. Your agent shouldn’t know that number specifically nor should the seller’s agent or the seller. Playing your financial cards close to the vest is an important part of the negotiation of the sales price. You alone should know how much you can ultimately afford to spend on a home.
However, your agent needs to know how much you’re willing to spend on a property — and that can be an entirely different number.
You need to decide how much you’re willing to spend each month, a number that I would hope will be based on your current personal finance situation — how much you’re bringing home, how much you’re paying out in monthly debt service, and how much you’ve already saved for the down payment.
Once you tell the agent you’re willing to spend, say, $250,000, she should show you homes that are priced not too much above that number. But telling her that’s what you’re willing to spend is different from showing her a preapproval letter that states the lender is willing to loan you up to $300,000.
If you’ve decided that $300,000 is too much for your budget, it doesn’t matter that the lender thinks you should be able to afford it. You may not feel that way. And showing that letter to your agent — even an exclusive buyer’s agent — could change the dynamics of your home buying experience.
Here’s one possible solution. Find out how much your lender would be willing to lend you — the maximum loan possible. Then, add in how much downpayment you have for the purchase. Then, decide if that’s the total amount you really want to spend.
Once you decide what is the maximum amount you want to spend on a home, ask the lender to prepare a preapproval letter for 80 percent of that amount. The lender will assume that you’ll be putting down 20 percent on the property. If you decide later to get a loan with a smaller down payment, say 10 percent, you will still fall within the guidelines of what the lender originally agreed to lend to you.
But when your agent clips a copy of the preapproval letter to the purchase contract, you’re not giving away the store.
You can even ask the lender to tailor the preapproval letter for the home you want to bid on, by working the numbers specific to the transaction.
I do want to address one other point in your letter: I don’t think a quality buyer’s agent will be trying to get you to ante up and spend more for a house just so the commission is slightly larger.
Most agents run their businesses by referral so they want you to have the best home-buying experience possible. That way, they hope, you’ll think of recommending them to your friends and relatives. That’s how they build their businesses and make a living.
Judging from the tone of your email, trust sounds like a big issue for you. If you don’t trust this agent, then you need to start shopping around for another agent. This is the single biggest purchase of your life and you need to be with someone you can trust to have your best interests at heart.
March 7, 2006
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