You decide that it is time to buy a home and you eagerly begin home hunting. You did not know that it was a good idea to get a pre-approval first so you skipped that step in the home buying process and just started to look at homes. You spend a few months looking at homes that you think you can afford and then you finally find the one! Now that you found your dream home, you decide to make an offer and start looking at mortgage options. Unfortunately, you find out that the mortgage payment on this dream home would be way too high and you can’t afford it.
As sad as this scenario sounds, it happens to many people because they do think to get a pre-approval first. Getting a pre-approval from a mortgage lender is free and easy and it shouldn’t take too much out of your time. Armed with your pre-approval, you will feel confident that you can afford what ever it is that you are looking for.
What Exactly Is An Approval?
An approval is when a mortgage lender determines that you are a good candidate for a certain type of mortgage. It is based on financial information you provide and you usually get an estimate of your loan amount, interest rate, and potential monthly payment along with this approval. The approval process changes from lender to lender and is also referred to as a pre-approval or a pre-qualification.
What Are The Advantages Of Getting Pre-Approved?
Getting pre-approved has its benefits. Check out some of the advantages you get by doing a pre-approval first.
- You and your realtor both are on the same page about how much you can afford so you don’t waste time looking at homes that are too expensive.
- Getting a loan will be much easier once you land an accepted offer as we will already have a lot of the information we need.
- The seller of the house you are trying to secure will be more likely to select an offer that is paired with a pre-approval as it shows them that you are qualified and serious.
- It is quick, free, and easy to do!
What Do Lenders Look For?
The main criteria that determines how much you can get a loan for are your assets, your income and your credit.
These are items that can be turned in cash if needed. This is known as liquidity. They can include things like checking and savings, stocks, real estate, personal property and more. A lender will reviews your assets to make sure you have enough money to cover the down payment, the potential closing costs, and also future payments after the closing.
A lender will review your income to make sure you can afford your monthly payment. They will also check your Debt-to-Income (DTI) ratio to make sure that your debts or liabilities do not offset your income beyond reasonable levels.
A lender will use your credit to determine pricing and other aspects of the mortgage. Having a good credit score shows that you are a responsible borrower. There are also minimum credit score requirements set for different types of loans.
Will Getting Pre-Approved Affect My Credit Score?
It depends on if we opt for a credit report or not. If we do formally pull credit, your score may drop by a few points. If multiple lenders pull your credit within a short period of time (usually 1 month), it only counts as one credit pull so your score will not drop further. If you already know your score and wish to save your credit pull for when you find your hope, we can do that as well.