The Real Story…
News and commentary about the real estate market and related topics. Dave Parrish, ABR ®, CRSA, CSP, GRI, ePRO ®, REALTOR ®, RealtySouth
Before you start looking at homes, you need to have some idea of what you can afford. You can get an idea of what priced home you can actually afford by doing some simple calculations on your own. However, since there are many different factors involved, including your own financial situation and variations in the qualification guidelines for different mortgages, the easiest and most accurate way to determine how large a mortgage you can qualify for is to talk to a lender.
Pre-approval is an important first-step before you even begin looking for a home… it lets you know just how much home you can really afford.
Getting pre-approved requires that the lender verify your financial information, and it serves as a commitment (although not a guarantee) to lend a specified amount based on that information. This gives you significant buying power with a seller who recognizes you will be approved for a loan and lets you know just what you can realistically afford to buy.
What is Pre-qualification?
Pre-qualification is an informal discussion between borrower and lender. The lender estimates the amount that you can borrow based solely on what you tell them about your income and assets. The lender does no verification and is not bound to make the loan when you’re ready to buy. Pre-qualification is not viewed by sellers as adequate confirmation that you are a qualified purchaser and is not viewed as acceptable. This is especially true in purchasing any bank-owned property.
How is Pre-approval Better?
To a seller, a lender’s pre-approval letter is considerably stronger than a pre-qualification letter. Loan pre-approval is based on documented and verified information regarding your employment, your income, your liabilities, your assets and the cash you have available to close on a home purchase. If a seller knows your financing is secure, your offer is stronger. Pre-approval also gives you peace of mind as you shop for a home, knowing that you will qualify for the proper mortgage amount.
Being pre-approved puts you in the position of being able to act quickly when you find that great home that other buyers are looking at as well!
Getting Pre-Approved
When you apply for a loan, your lender will look at several things:
• Down payment amount
• How long you have been employed in your current position
• Whether you have the funds on deposit for your down payment and closing costs
• Your income-to-debt ratio and your credit report
Lenders nowadays place much emphasis on the credit report. Credit bureaus compile a record of debts from credit card companies, banks, department stores, and other firms. This information appears on your credit report, so it shows whether you pay your bills on time. Lenders develop credit ratings based on how well you manage this function. The higher your credit score, the more flexible lenders will be in loan approval and specific requirements.
When you meet with lenders, ask how they decide if you are a good credit risk. It is likely to be from a credit report. Lenders can order the credit report for you and discuss your score. If your credit is less than sterling, they can usually offer suggestions on how to strengthen your credit position.
A WORD OF CAUTION: Having too many lenders look at you credit drive your credit score down as one of the components of the credit score deals with the number of credit score inquires. Every inquiry is a hit and drives your score down, so … SHOPPING LENDERS CAN ACTUALLY HURT YOU.
RECOMMENDATION: You can speak with several lenders without driving your credit score down by following these guidelines:
- If you haven’t given them your social security number or driver’s license, they can’t get your credit report / make a hit on your credit score.
- While you can’t get pre-approved without providing this information, it does allow you to at least interview the possible lender agents to decide perhaps who you would rather work.
- Note that there is actually little variation on what your real interest rate is from legitimate lenders. What varies is the terms and fees. Items such as Origination Fees and Discount Points are fees that are charged that in effect buy down the interest rate. Normally, you are better off NOT buying down the rate, as it takes several years to actually realize any savings. But everyone’s situation is different.
- Ask for an estimate of closing costs associated with the loan. Ask for an explanation of the fees/charges. Some lenders use this as a way to extract additional monies and drive up the profitably of a loan, with what are known as “Junk Fees.”
- If a lender ever mentions they can get a property to appraise for more than the asking price, BEWARE … this is a technique often used by PREDATORY LENDERS and possible mortgage fraud.
If all this seems a little overwhelming, don’t hesitate to contact your REALTOR® to help you navigate through this and other issues surrounding your home buying decisions.
