Buying a home is most likely the largest purchases you will ever make. Before you hire a realtor and before you make an offer on a home, you should get pre-approved for a mortgage loan by the lender first.
#1 A pre-approval will tell you exactly what you can afford. You don’t want to waste time looking at homes you don’t qualify to purchase.
To receive a pre-approval from a lender you are required to provide specific information regarding your income, assets and debts. The lender will ask to see paycheck stubs, sometimes two years tax returns, and they will call your employer to verify employment and the stability of your employment. The lender will require bank statements, any investments, and other assets to verify your ability to pay your debts and to verify where the money will come from for your down payment. Your credit will be pulled so the lender can view your monthly minimum payments on all your credit debts to factor your debt to income ratio, and determine at what loan amount you will qualify.
#2 A pre-approval tells your realtor and the sellers you are a serious buyer.
Not only can your realtor fine tune the search based on your qualified purchase price and better guide and advise you through the home buying process, but the sellers will feel confident in accepting your offer. They know you have met the criteria and are approved to purchase their home. A seller is most likely to accept the offer from a pre-approved buyer then one that is not pre-approved.
#3 A pre-approval helps you understand what monthly mortgage payment you will be comfortable with once you factor in property taxes, homeowners insurance, private mortgage insurance (if applicable) and possible HOA dues in some communities.
I’ve shown homes at the same price point in various communities but the property taxes and HOA fees have varied enough that it made a difference in the monthly payment and affected whether or not my buyers felt comfortable with the monthly debt.
#4 Letting a lender pull your credit sooner then later in your home buying process can help you reduce your debt and increase your disposable income.
If you haven’t yet looked at your credit report, asking a lender to prequalify you for a home loan may reveal items on your report you never knew were there and there may be items negatively affecting your ability to qualifying for a home loan. You may have outstanding liens or late payments that are bringing your overall credit score down and/or the monthly minimum payments on your credit debts may be exceeding the acceptable ratio for purchasing in your desired price point. Looking at your credit history with an expert may uncover areas in which you can reduce debt, increase disposable income and qualify for a better interest rate (which affects your overall monthly payments on your home loan). The lender can educate and advise you on how the above items are impacting your credit and assist you with how to reach your goal of home ownership
Please note, you can’t rely on the “free” credit reports advertised and the calculators online to determine your qualification. Free credit report sites do not use the same algorithm as the lenders use to determine your overall credit average and different loan programs have different criteria.
Have you ever seen any surprises on your credit report when you applied for a pre-approval? Or, have you ever adjusted your home search price point, either up or down, after receiving a pre-approval?
F.C. Tucker Geist
The Tumbarello Group