Getting pre-approved for a mortgage will enhance the homebuying experience (Jack Strama)July 6, 2010
Recent research indicates that if homebuyers don’t get pre approved for their mortgage before they buy a home, they are more likely to make a poor choice of mortgage program that may come back to haunt them.
Too often they will choose the first program presented or the one with the lowest monthly payment, ignoring other important terms.
Shopping for a home and choosing between alternative features “can deplete individuals’ cognitive resources, resulting in sub-optimal home-financing decisions,” according to associate professor Vanessa G. Perry and doctoral student J.D. Lee, who teach at the George Washington University’s business school in Washington, D.C.
This phenomenon termed “cognitive resource depletion” has been identified as “an often crucial factor.” Perry and Lee have concluded that buyers’ minds are so “taxed” after choosing a home and negotiating the contract, that they often make poor choices when applying for their mortgage loan.
Here’s how the test has been described in a L.A. Times posting:
Perry and Lee created two groups. One was presented with an online-shopping simulation that involved 14 choices about housing characteristics, including colors, finishes and possible trade-offs, if a participant came in over budget. After completing the simulation, they were asked to choose among a set of mortgage alternatives presented in a format adopted from the website of a national lender.
The other group did not complete the online-shopping exercise. Instead, participants were informed that they already had selected a new house and then were given the same mortgage choices as the first group.
The loan choices consisted of five distinct products. Each included a monthly payment, an interest-rate offer and a loan term. After each choice, a link was presented that said, “For more details, click here.” Anyone who clicked on the link was directed to a website that offered detailed information about mortgage products and financing terms.
The results? Almost half of those who participated in the house-shopping exercise selected a higher-risk mortgage. Fewer than 1 in 5 of those who did not have to work through the buying simulation did the same.
In other words, the resource-depleted group was far more susceptible to picking more dangerous financing. These participants were so worn out that they didn’t devote as much time to selecting a loan as those in the second group.
“Instead, they focused on the lowest monthly payment regardless of the other terms,” Perry said.
Our experience leads us to agree. That’s why we always recommend that our clients get pre-approved for a mortgage BEFORE buying a home. Once they know their borrowing ability, down payment requirement and monthly cost, we can help them shop more effectively and focus on finding the home that best fits their needs and desires. And yes, it makes it less stressful for us all!
Plus, presenting a pre-approved letter at the time of an offer makes our buyer’s offer more attractive to as seller and helps insure the proposed closing date will be met.