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.

Calculating How Much You Can Afford in a Home

When most people start their home buying process, they begin in what they think is the best place: searching current home listings for the right property to purchase. Finding that perfect home in the ideal neighborhood is the goal, and certainly the fun part of home shopping, but if you go straight to the search, you’re actually missing out on a critical step before that: calculating how much home you can afford. Here are the factors to take into consideration when trying to determine your budget so you can find that dream home and be able to get qualified for a loan and make the payments.

1: Income

The first factor in determining how much you are likely to get approved for on a home loan is your total monthly income. This may be a salary from a job, but it could also include alimony, investment income, and other sources that you can count on for regular income. Even though lenders often use gross monthly income to determine your eligibility for a loan, you will need to make calculations based on net income after taxes and other withholdings are taken out.

2: Monthly Obligations

Once you know how much money you have coming in each month, the next step is to write a detailed budget that includes all your monthly obligations. Start with the stuff you have to pay—car loans, student loans, and credit cards or other revolving debt—then move to essential like groceries, car insurance, and utility bills, then finally leave some wiggle room for non-essentials like entertainment and clothing. If you’re not sure on some of these things, track your spending for a few months before you start this process so you have an accurate picture of your spending.

3: Down Payment & Closing Cost Cash

Most lenders today don’t have a lot of options for zero down payment loans, although they do exist and might be an option for some buyers. For all the other home buyers, you will need to have at least 3% to 5% to put down on a home, but preferably you should have between 10 and 20% of the total purchase price to put down (the amount you will be required to put down depends on the type of loan(s) you are eligible for). Also note that if you do not put down 20% you will have to factor in private mortgage insurance (PMI) in your monthly payment.

4: Credit Score

One final factor before you start home shopping is to take a look at your credit score. Having a poor credit score can significantly impact your ability to get approved for a home loan. In addition, if you are highly leveraged (with lots of outstanding debts on your credit report), a lender will view you as more of a risk and may reduce what they are willing to loan you.

Many future homeowners go and get pre-qualified for a mortgage to get an idea of how much they are likely to be able to borrow, but it’s important to note that sometimes lenders will tell you that you can get approved for an amount that is much higher than your current budget and lifestyle can support. Don’t think that you have to purchase at the top end of your pre-approval amount—take all your calculations into consideration before you decide.

To find out more about loans for homebuyers and get pre-qualified or pre-approved, call Altius Mortgage today.

The Difference Between Mortgage Pre-Qualification and Pre-Approval

Have you heard people talking about getting pre-qualified or pre-approved for a mortgage loan? Both terms describe the process of figuring out how much you are likely to get approved to borrow from a lender so you have an idea of how much home you can afford when you’re looking for houses, but there is a little bit of a difference between the two, and it’s important to understand the nuance.

What’s Pre-Qualification?

Pre-qualification is generally considered the first step in a mortgage loan process, and it’s designed to be a quick approval to give you an estimate of how much you can borrow. You will provide the lender with an overview of your financial picture, including your existing debt, your income, and any assets that you own. In return the lender will tell you how much they might be able to loan you to purchase a home. Usually the pre-qualification process can be done over the phone or in person, and sometimes you can do it online as well. It doesn’t usually include an in-depth credit check or financial analysis and is intended as an estimate.

Pre-qualification gives you the chance to talk to your lender about what loan options are available and discuss questions you might have about why the number is lower than you anticipated, or what you can do to increase it if you think you might want to borrow more. It’s also not a guarantee because it’s based only on the information you provide to the lender—if they find something in the in-depth credit check that you did not disclose it could change your ability to get a loan.

What’s Pre-Approval?

Pre-approved is generally a term used for a more in-depth analysis of your financial picture. You get pre-approved by filling out an official mortgage application, paying a fee, and providing the necessary documentation for the lender to do an extensive credit check. The lender then comes back with a specific amount that they are able to lend and you can find a home that fits your budget. You can also get an estimate of the interest rate you will qualify for, and may be able to lock in a rate if you think they might go up.

While both processes will give you an idea of how much you can borrow, and the exact difference between the might seem small, it’s important to understand the differences. The latter, pre-approval, often shows sellers that you are serious about buying a home and that you are one step closer to being able to obtain a loan.

Another advantage of getting pre-approved is the ability to shop for a home that is at or below the range you have been approved for with confidence that you will be able to get a loan to purchase the home. That way you won’t end up wasting time looking at homes and making offers only to find out you can’t get a loan for that amount.

To find out more about pre-qualification and pre-approval and talk to a mortgage lender today about how much you can get in a loan, call Altius Mortgage today.