Pre-Qualification and Pre-Approval
In the first step of the home buying process perspective home buyers should determine what they can afford, their home “buying power”, before beginning that hunt for their dream home. The most efficient means of determining your “buying power” is by getting pre-qualified or pre-approved for a mortgage. Most lenders will do this at no cost and I can help you find a lender if you do not already have one.
Pre-qualification and pre-approval sound similar but there is a significant difference between the two. A pre-qualification letter is a good start, but a lender issuing a pre-qualification letter is under no obligation to make you a loan. A pre-approval letter obligates the lender to make a loan, subject to appraisal of the property.
In order to issue a letter of pre-approval, a lender gathers information from the buyer consisting of pay stubs, bank statements, and sometimes copies of income tax returns. The loan officer will also look over your assets, debts, and credit report. Any problems encountered on your credit report can usually be worked out with the assistance of your loan officer to help you get the mortgage you need.
As a general rule in determining your buying power, your monthly housing costs should not exceed 28% of your monthly gross income. Housing costs are a total of your mortgage payment, property tax, and homeowners insurance. If you have long-term debts such as car payments or student loans, your total monthly payments, including housing costs, should not exceed 36% of your gross monthly income. Lenders can be somewhat flexible with these basic guidelines, depending on the type of loan you need and the size of your down payment.
Without assessing their home buying power, many perspective homebuyers fall in love with homes that they cannot afford. On the other hand, buyers taking the first step by getting pre-approved or pre-qualified are sometimes surprised to find that they can afford more house than they originally thought possible. Regardless, with a pre-approval or pre-qualification a buyer is better prepared to meet the challenges of finding the perfect home.
In addition, a buyer with a pre-approval in hand has more leverage in negotiations with a seller. A seller with a choice of buyers will choose the buyer with the approval, even if their offer is not quite as good. A seller knows that a buyer with pre-approval is qualified, more likely to close the transaction, and capable of closing a deal in less time. Although a pre-approval is not a prerequisite to making an offer, it adds tremendous credibility and strength to a buyer’s position, especially in today’s hot real estate market where multiple offers on homes are common.