Home Shopping Step 1, Pre-Qualifying or Pre-Approval
Buying a home is easily the biggest purchase most will ever make, this is a tried and true cliché. In reality, buying a home is a series of decisions with multiple purchases leading up to the biggest one. (*) Solid, well informed choices along the way are critical to a successful, satisfying buying experience.
An early decision is your loan. In reality this decision may be a bigger one than the home purchase. If you ever look at the disclosures provided in the loan process you will eventually see that the purchase price of the home may be as little as 1/3 to 1/2 of the total outlay of cash over the life of a loan. Once you find the "perfect home" you run the risk of your heart overwhelming your head if you are not pre-approved. Advance preparation can avoid heartbreak later on.
What is Pre-Qualifying? Pre-Qualifying can be done by anyone with a calculator and a bit of knowledge. The problem with pre-qualifying is that it doesn't do much more than provide a range of what you might be able to afford. To know what you can afford, you really need to be pre-approved.
Pre-qualifying is essentially looking at your gross monthly income and multiplying that number by the allowable debt ratio. For example, if you make $5,000 per month "before taxes" and use a 40% debt ratio, you would be allowed to have a maximum debt payment of $2250. Notice I didn't say mortgage payment. To determine your allowable mortgage payment, you need to subtract any credit debt from this amount. If you have a car payment of $350 per month, you will be left with a maximum allowable mortgage payment of $1900.
How much does $1900 per month allow you to buy? Well it really depends on a lot of factors. First, what interest rate do you qualify for? How much down payment do you have? What about property taxes, home owner's insurance, mortgage insurance, home owner's dues, closing costs? There is a lot to take into consideration.
The best answer for the question is to work with a lender early to be Pre-Approved. A Mortgage lender will not only run the calculations, but fill in many holes in the pre-qualification process and explore a myriad of options you need to consider. A Pre-Approval involves filling out a loan application (I do mine with buyers over the phone), signing a number of disclosures and forms, providing necessary documentation and obtaining a full credit report.
Your file is then submitted to a bank's automated underwriting system for approval. If the information you filled out on the application is correct (I review the applications and compare them to your documentation prior to submission to help ensure this) you will receive a valid approval, rate and debt ratio for the submitted program.
A complete Pre-Approval should be step one in a successful home buying process. Knowing what you can afford will help you shop smarter. Discovering early on any issues on your credit report which need to be corrected can help you qualify for better rates and programs. Knowing the rates early will allow you to keep an eye on this changing factor. If rates change dramatically, it will affect how much you qualify for. Tracking rates will be useful when it comes time to lock a rate too.
A knowledgeable agent can provide you with some pre-qualifying information, but only a lender can get you Pre-Approved and truly prepared to shop. As a Realtor and Licensed Lender, I offer my clients both services. I also make this promise, "if you can beat my mortgage offer, you will have not only my blessing, but my encouragement to take the better deal. I am committed to your home buying success." In taking this approach my clients can feel comfortable getting this step out of the way, and still allow them to shop for the best loan possible. I have outstanding programs available and extremely low rates and fees, but I don't offer FHA or some programs builders may provide.
So, step one, or as early in the process as possible should be obtaining a loan pre-approval. This will make for a smoother, happier shopping process.
*Some purchases and decisions you make along the way.
•1. An agent
•2. A Lender
•3. The Home
•4. An inspector
•5. Title Company
•6. Escrow Company
•7. Moving Company