 MORTGAGE
PRE-QUALIFICATION VS. PRE-APPROVAL
The First Step To Buying A Home Is Borrowing
Shopping for a home before you've been pre-qualified for a mortgage is like
putting the cart before the horse. The same can be said about writing a
contract to buy a home if you aren't pre-approved for a loan.
First, understand that any lender will want to know where you stand financially,
so you should figure this out before you do anything else. You need to determine
how much money comes into your household each month-and how much goes out.
Where You Stand
Start by calculating your total monthly gross income, including your regular
pay and other sources of "hidden" income: a raise that's due before your
first mortgage payment; a history of bonus or overtime income; income from
investments and rental property; child support and alimony.
Now calculate your monthly debts: credit cards, student loans, car payments,
etc. Do not include monthly household expenses such as utilities, groceries
or utility bills.
Next, add up any assets you could use for a down payment: savings, gifts
from a relative or friend, stocks and other investments. If you have good
credit, some programs allow you to buy a home with no down payment at all.
Still, most borrowers make down payments of 5% to 20%.
After compiling all of these numbers, you should have a picture of where
you stand financially. The next phase deals with pre-qualification and pre-approval.
Pre-qualification
Pre-qualification is simply a verbal exchange in which the lender looks
at your statement of income and debt, and estimates how much you can afford
to borrow, assuming no extenuating circumstances. It's a guideline-not a
commitment. With a rough idea of how much you can afford, it's much easier
to go home shopping.
When it comes time to actually purchase a home, however, the lender starts
verifying all the information on your application and may find some inaccuracies
or problems in your credit file, which could delay, even cancel, settlement.
Being pre-approved before writing a contract can prevent such headaches.
Pre-approval
Loan pre-approval is a commitment from a lender to provide you with a loan
for a specified amount. This means the lender has already verified everything
on your loan application.
Lenders determine how much you can afford to spend on housing by calculating
your debt-to-income ratio. With many loan programs, your monthly mortgage
payment, including principal, interest, taxes and insurance (if applicable)
cannot exceed 28% of your gross monthly income. That amount combined with
the rest of your monthly debts cannot exceed 36%.
If you're in a seller's market, it's important to go the extra step for
pre-approval-removing a seller's fears that something may ruin the deal
at the last minute. Pre-approval also gives buyers a better negotiating
position in a multiple-offer situation. Sellers are more likely to choose
pre-approved buyers over buyers who haven't proven they can get a loan.
Give us a call to find out more about your buying power and to get started
on the road to homeownership today. |
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