Pre-approved Mortgage Guide
- Sep. 10, 2018
- Rosemarie Pirio
- Home Loans
What Is a Pre-Approved Mortgage?
"What's the first step in the home buying process and how do I make sure to find the home of my dreams?" asks the excited homebuyer.
1. Examine Your Financial Situation
First, you'll want to take a look at your current financial situation, and see where you need to make preparations. Examine your monthly income and expenses, check out your savings account, and take a peek at your credit report. Do you already have enough for a down payment? Down payments can range from 3% to 20% of the loan amount, so make a plan and set a time frame to save for this.
Here are some of the other costs to consider when buying a home:
- Title and Escrow fees
- Appraisal fee
- Home inspection fee
- Home insurance
- Lender fees
- Mortgage points
- Other various fees
- In some cases, private mortgage insurance or mortgage insurance premium
Note that you may not have to pay all of the fees, sometimes the seller will pay, the lender may cover it, or you may just have to pay in advance and get refunded later.
Take a Peek at Your Credit Report
If it's been a while since you've last seen it, it's a good idea to check your credit report with the 3 credit bureaus: Equifax, Experian, and TransUnion. Your credit score is something a loan officer will be looking at when determining how much you are qualified to borrow. The insurance agent that you will be working with to get home insurance will also consider your credit history and you may qualify for a discount if you have good credit. It's in your best interest to clear up any errors that may appear on your credit reports as soon as possible.
2. Getting Pre-Approved
Once you have a grasp on your financial situation, and have a rough estimate of what you think you can afford for a monthly mortgage payment, it's time to contact a licensed loan officer and get pre-approved. Getting pre-approved before you start searching for your dream home is critical because the pre-approval will determine, based on your credit and income, if you qualify for financing, and for how much. Other benefits include:
- Sellers prefer to work with pre-approved buyers because they already know their credit and income qualifies them to obtain home financing. This will give your offer on a home an advantage over buyers.
- In the eyes of a real estate agent, a pre-approval signals that a borrower is well-qualified and serious about buying a home. The higher chance they have of closing a deal, and receiving a commission, the harder they will work and the more attention you will receive.
To get pre-approved, the loan officer will make a thorough investigation into your credit history, credit score, assets, liabilities, income, etc. Try to provide as much information as possible to the loan officer so they can make the best assessment of your financial situation. The loan officer will look at your credit report, and will ask for more information if needed. If you believe your financial situation has some issues that are not easily understood, inform the loan officer right away and explain these issues.
Your debt-to-income ratio will be a key factor the advisor uses when determining how much you can borrow. The debt-to-income ratio is the percentage of personal debt you are carrying in relation to how much you earn. Generally speaking, the ideal ratio is 36% and below, anything over this may be seen as riskier. There are various exceptions to this 36% rule, so if you are looking at your monthly income and expenses and have become concerned, speak with a loan officer before taking yourself out of the ring.
A Pre-Approval is Not a Guarantee
It's important to note that a pre-approval is not a guarantee that you will be approved for a mortgage for the home you have chosen; it is conditional on the appraisal of the property. Also, if your financial situation changes, (you lose your job, make a major purchase, run up credit card bills, etc.) the loan officer will have to reassess your situation and recalculate your maximum loan amount.
3. Dream-Up Your Dream Home
Now that you're pre-approved, you're ready for the fun stuff! It's time to imagine the ideal home, make a checklist of what makes it so special, and get out there and find it. Is it in the sunny suburbs or is it in a lively downtown area? How many bedrooms does it have and what kind of commute do you want? Is there a pool in your future? The more details you provide your real estate agent, the easier it will be for them to find something that fits your lifestyle.
When looking at homes, really inspect them, and write down details so you can remember. Find out how old the home is, if the electrical, plumbing and heating are up to code, what the crime rate is in the area, how neighboring schools perform, the condition of the roof, the distance to shopping centers and freeways, etc. Some of these factors will play a role when it comes to getting home insurance, so if there is a home you are strongly considering, it's a good idea to ask to see the current homeowner for the Comprehensive Loss Underwriting Exchange (C.L.U.E.) report. This report will provide a record of insurance claims on the house, so you can spot any potential issues.
During this process you will be working closely with your real estate agent. Don't be afraid to ask questions and be sure to set up a communication plan; do you expect calls weekly, or do you prefer to be emailed? Also, coordinate a plan to go about physically inspecting the properties your real estate agent will be sending your way.
Share with us your thoughts on this topic below, and if you haven't done so already, check out the key players in the home buying process.