Getting your financing in order before you start seriously shopping for a home is one of the most important steps in the homebuying process. A mortgage pre-approval can help you understand what you may be able to afford, identify the loan programs available to you and put you in a stronger position when it is time to make an offer.
It can also help uncover potential financing issues early, when there is still time to address them rather than discovering a problem after you have already found a home.
Pre-Qualification vs. Pre-Approval
The terms pre-qualification and pre-approval are sometimes used interchangeably, but they do not always mean the same thing.
A basic pre-qualification may be based primarily on financial information provided by the borrower. A more complete mortgage pre-approval generally involves reviewing credit, income, assets, debts and other documentation needed to evaluate the borrower’s ability to qualify for financing.
The exact process can vary by lender, but when you are preparing to make an offer on a home, a thoroughly reviewed pre-approval can provide much more useful information than a simple estimate of what you might be able to borrow.
Know Your Price Range Before You Start Shopping
One of the biggest advantages of getting pre-approved is establishing a realistic homebuying price range before you begin looking at properties.
However, the maximum mortgage amount you may qualify for is not necessarily the amount you should spend. Your comfortable monthly housing budget should also be considered.
A pre-approval allows us to look at estimated principal and interest, property taxes, homeowners insurance, mortgage insurance when applicable, homeowners association fees and other expenses that may affect the total monthly payment.
Understand Your Loan Options Early
There may be several ways to finance the same home purchase. Depending on your situation, those options could include conventional, FHA or VA financing, as well as first-time homebuyer or down payment assistance programs.
Reviewing these possibilities before you find a home gives you time to compare down payment requirements, estimated closing costs, monthly payments and other important differences between the available options.
It can also help determine how much cash you should plan to have available for the purchase.
Identify Potential Problems Before You Find a Home
A pre-approval is not only about determining how much you may be able to borrow. It is also an opportunity to identify issues that could affect mortgage qualification.
These could involve credit, income documentation, employment history, available assets, debt obligations or other underwriting requirements.
Finding an issue before you are under contract gives you more time to determine whether it needs to be addressed and what options may be available.
Be Better Prepared to Make an Offer
When you find the right home, you may need to make a decision quickly. Having your financing reviewed in advance means you are not starting the mortgage conversation after you have already decided to submit an offer.
Your real estate agent can also use your pre-approval to help structure an offer within the financing parameters that have already been reviewed.
In many transactions, the seller and listing agent will expect a buyer who is obtaining financing to provide a pre-approval letter with the offer.
Your Pre-Approval Letter Can Be Updated for the Property
Once you identify a home and determine the offer you want to make, your pre-approval letter can generally be prepared or updated to reflect the appropriate purchase price and financing structure.
Before submitting the offer, we can also review the estimated payment and cash needed for that particular property. Property taxes, homeowners insurance, homeowners association fees and other costs can vary significantly from one home to another.
This allows you to see the financing associated with the specific home before deciding whether the numbers work for you.
A Pre-Approval Is Not a Final Loan Approval
A mortgage pre-approval is an important step, but it is not a commitment to lend or a final loan approval.
Final approval will depend on the complete loan application and underwriting process, acceptable documentation, the property, appraisal when required, title and other applicable loan conditions.
Your financial situation also needs to remain consistent during the process. Changes involving employment, income, credit, assets or new debt can potentially affect mortgage qualification.
When Should You Get Pre-Approved?
You do not need to wait until you are ready to make an offer. In many cases, it makes sense to begin the conversation before you start seriously looking at homes.
If everything is already in good shape, you will know you are prepared to move forward. If something needs attention, you will have time to work on it before finding the home you want to buy.
Ready to Get Pre-Approved for a Mortgage?
A good pre-approval should do more than provide a maximum loan amount. It should help you understand your financing options, estimated monthly payment, cash needed for closing and the mortgage strategy that makes sense for your situation.
Questions or ready to get started?
Call or text me at 240-670-5090 or email me at CJMT@mainstreethl.com.
Ready to explore your options? Start your prequalification online.
