Dear Heather,

I wanted to look at a property but the agent said she would prefer that I have been preapproved before showing it to me. Why is this, and how do I go about it?

First Time Buyer

Dear First Time Buyer,

Many people do not have any sound basis on which to base the price range in which they can search for property. Unfortunately, often the tendency is to think they can afford a little more than they actually can, thus looking at some beautiful properties, only to be disappointed because they then discover they cannot afford them.

WHY SHOULD I BE PRE-APPROVED?

By getting preapproved you know your financial perimeters. Actually when you make an offer, it will be much stronger when presented together with a letter that says you have gone to the time and trouble to research the financial side of things with your bank.

And more importantly it tells the seller and the agent that you are serious. Any savvy seller will require a pre-approval with an offer and many sellers require preapproval before showings.

Typically a seller goes to a lot of time, and sometimes expense, in order to get their property ready for showing (particularly if they have small children). Often times the seller will spend a couple of hours or more prepping the house — mowing the grass, cleaning the kitchen and bathrooms, tidying the family room, etc.

A showing doesn’t just take the 15 or 20 minutes or so of your time to view it. The agent has to make arrangements, notify tenants, sometimes collect keys from elsewhere, allow travel time, arrive early to open up the house and stay afterwards to ensure all lights are off and the house and pets are secure.

It is difficult for all parties to justify the time and money involved for someone who hasn’t even been preapproved, and really doesn’t know whether they are in a position to buy or not. Since the peak of the market about seven or eight years ago, banks have been extremely cautious about how much they lend, on what they lend and the risk attached to whom they lend.

PREPARING FOR PREAPPROVAL

The lending institutions will require disclosure and verification of the following before processing your application:

1. Completed application (one for each bank if going to multiple companies)

2. Letter or contract from current employer and pay stubs/statements to verify income

3. If self-employed: payroll tax returns from the last 12 months, or two years’ financial statements

4. Valid photo ID (passport, Bermuda driver’s licence)

5. Copy of a rental agreement if rental income is being received on an existing property and statements to verify income received

6. All income should be included.

The preapproval process can take as long as six or seven weeks, particularly if you are not able to provide the bank with the items outlined above in a timely manner.

MORTGAGE PREAPPROVALS

If you wish to purchase a home, you need to be aware of the following:

1. You will be required to verify that you have in savings, the required down payment (25 per cent of the cost of the house) plus a bank appraisal plus half the legal fees and stamp duty on the conveyance, plus the finder’s fee for the bank mortgage, plus the costs of stamp duties and legal fees associated with the mortgage documents.

On a house which costs $850,000 this translates into about $238,059 and must be confirmed by yourselves to the lending institution prior to issuance of a preapproval letter.

2. The preapproval letter, stating the amount the bank is willing to lend, is usually only valid for 90 days

3. To extend the preapproval your (the applicant’s) details must be reverified.

4. The final mortgage amount offered will be based on your LTV (loan to value ratio) ie how much you earn compared to how much you will pay per month in loan payments. Usually the banks will not go over a maximum of 50 per cent of your combined salaries. If you have credit cards and/or other loans, say for schooling, college funds for the children, car, boat, etc, this will be calculated into your loan to value risk profile. Some people have no idea how much a loan of say $600,000 over 25 years calculates into on a monthly basis. Your banker or your real estate agent can help you.

ABOUT MORTGAGES

Typically, mortgages are only offered to applicants between 18 and 65 years old (65 is the maximum age for the end of the mortgage term). The mortgage term has a maximum 30 years (based on age and ability to repay). Interest rates can be fixed or variable and can vary from one lending institution to another. Mortgage funds will only be released upon the bank’s receipt of:

a) a signed sales and purchase agreement for the property.

b) a copy of a home insurance policy for the property.

Without doubt, having a pre-approval letter prepares you mentally and financially towards achieving your goals, and puts you in a much stronger position when making an offer than someone who does not have one. Sometimes being preapproved is the only difference between getting your dream home and losing it to someone else.

Happy house hunting!

Heather Chilvers is among Coldwell Banker Bermuda Realty’s leading sales representatives. She has been working in real estate for 25 years. If you have a question for Heather, please contact her at hchilvers@brcl.bm or 332 1793. All questions will be treated in confidence.