3 Important Things to Know About Mortgage Pre-approval

Pre-Approved Choice Mark Selection Status Option Concept

There’s a lot to think about when you’re getting ready to buy a home, and while the most exciting part of the process is getting out there and looking at homes to find the perfect one for your family, there are a couple of important steps to take before you start your search to ensure the process goes smoothly. One of those steps is pre-approval.

1: Home Much Home You Can Afford

The question of how much home you can afford is probably the first one you should be asking. There are a couple of ways you can figure this out, but the easiest way is to take your monthly income after taxes, subtract your monthly debt obligations such as car payments and insurance, and calculate your monthly spending on things like groceries and gas, then figure out what is left.

Lenders will do the same thing during the pre-qualification process, although they use a very general calculation that includes only your debt and income. Usually they will allow loans up to about 30 percent of your monthly income before taxes, but keep in mind they don’t know your discretionary spending habits, so if you want to have more money each month for things like entertainment or clothing, you might prefer to borrow less and have a lower monthly payment.

2: There’s a Difference Between Pre-qualification and Pre-approval

There is a difference between pre-qualification and pre-approval. Pre-qualification usually involves discussing your income, assets, and debt obligations with the lender and they’ll give you an idea of about how much home you could qualify to buy. Pre-approval is the next step, so the lender will actually run your credit and verify the information so they can let you know with more certainty how big of a loan you could get. This is usually guaranteed for up to 120 days, so you can get pre-approved and then start your home search.

It’s important to note that neither pre-qualification nor pre-approval is a guarantee that you could get approved for a loan—that will not happen until you have a home to purchase and a specific loan amount.

3: It Should Be Your First Step in the Mortgage Process

The home buying process is an emotional one—you’re deciding on a place where you will spend most of your time, and raise your own family. If you begin your home search and fall in love with a home that is out of your price range, the ones that you could afford might be a disappointment.

Home sellers are also more likely to take you seriously in the search if you have been pre-approved for a loan, indicating that you’re not just browsing but you are in a buying phase.

The good news is that mortgage pre-approval is a quick process, so talk to a Salt Lake City mortgage lender today to find out what you need to do to take this important step.

Are Low Down Payment Loans Really a Good Option?

FHA Loan Federal Housing Administration Lending Concept

After the housing market crashed in 2008 and 2009, a lot of people heard about how the proliferation of low- and no-down-payment loans contributed to a housing market where millions of consumers had little or no equity in their homes. These low-down-payment loans were criticized, and some lenders severely reduced or eliminated them. Low down payments might not be the right answer for every homebuyer, but it’s important to understand when they are a good choice and when you’re better off putting some extra money down.

Homebuyers With Limited Cash

The most common low-down-payment loan for homeowners is through the Federal Housing Administration (FHA). FHA loans offer buyers the opportunity to purchase a home with as little as 3.5 percent down payment. As home prices continue to rise, the prospect of needing 10 or 20 percent to put down can put the dream of homeownership out of reach for many first-time homebuyers. In these cases, a low down payment option might be the best way to purchase a home.

Buyers with High Debt-to-Income

Another reason a homebuyer might opt for an FHA loan is that they would be otherwise unable to qualify for a loan through traditional means, often because they have a debt-to-income ratio (or DTI) that would make lenders wary of lending to them. DTI is a measure of how much money you own on your monthly debt obligations compared with your monthly income, and if the ratio is unfavorable, you will either be denied a loan or will end up with a higher interest rate. This also allows you to keep more of your current money to pay down your debt, rather than putting it down on a home.

Liquidity

There are some other advantages to putting only a small down payment on your home, and perhaps the biggest is keeping more of your money. Even if you have enough to put 10 or 20 percent down on a home, it’s not always the best choice. Keeping some of the money in savings can help you remain flexible in case of an emergency, job loss, or other investment opportunity that comes along.

The Cost of Low-Down-Payment Loans

The key difference between someone who is able to qualify for a conventional loan with 10 or 20 percent down and someone who gets a loan with a low down payment is private mortgage insurance (PMI). PMI emerged in the wake of the housing crisis as a way for lenders to protect against homeowners whose home values went down and they had no equity, leaving them “underwater” on their loan.

Premiums on PMI have increased over the past few years, and fees have gone up as well as a way for the U.S. Department of Housing and Urban Development (HUD) to shore up its insurance fund with more and more borrowers turning to FHA loans. Other recent changes to the PMI process include higher fees up front, and the requirement that borrowers pay PMI for the entire life of the loan.

Find Out if These Loans are Right for You

If you are considering a low down payment loan, it’s important to talk to a mortgage lender in Salt Lake City about all the options available so you can determine which one works best for your financial situation.