What Is Pre-Approval And How To Get It
Pre-approval and pre-qualification are two different things. When you set out to buy a house it helps to have a general idea on how much you want to spend. But a pre-approval is the real test of how much you can afford to spend.
Simply filling out a mortgage calculator online is not the true test of how much house you can buy. This can give you a brief overview of the cost of a home due to how much you are putting down and how much interest and for what percentage rate you are obtaining a loan. But this only gives the surface numbers.
To really be approved to purchase a home, you will need to sit down with a lender with all your cards on the table and go over every penny that comes in and goes out in your household.
The lender will look at your income and any other income from other sources such as alimony, child support, rentals, etc. Then determine how much is going out each month. This is called your debt to income ratio. Typically lenders don’t want more than about 28% of your income to go towards your mortgage payment and this includes the taxes, insurance and interest, not just principle payment.
Once all the numbers are figured out, the lender can issue you a pre-approval letter. This is a valuable document when submitting an offer. It shows the seller you are serious about buying and have already done your homework when it comes to finance and can really afford this home. Several lenders may put an actual amount on the letter that you are approved up to but in this market you may want to negotiate a bit. Have your lender close at hand to be able to write up an offer for slightly more or the exact amount you are offering. This doesn’t inform the seller that you can afford more, if you really don’t want to pay more.
Being pre-approved is really putting you in the driver’s seat already buckled and ready to go. It makes you ready and willing to buy a property when the time comes. Consider sitting down with a lender today and figuring out your limit. Remember just because you are approved to a certain amount does not mean you have to buy up to that amount either. Be a smart consumer and know what you want and for how much.