5 Important Benefits of Getting Pre-Approved For Your Home Loan
Pre-approval is an essential step in the mortgage process. It provides you with a firm estimate of how much home you can afford and sets you up for successful home purchase.
Furthermore, showing serious interest to sellers can make you appear more qualified. Furthermore, fast-forwarding the mortgage process when you find your dream home will save you both time and money in the long run.
1. Youll Know What You Can Afford
Pre-approval for a home loan is an essential first step in the homebuying process. It tells you what you can afford to buy, based on your income and debt obligations. Furthermore, it makes you more appealing to sellers and allows you to act quickly when making an offer on a property.
During the home buying process, you will be asked for information regarding your credit history, assets, debts and other aspects of your financial situation. This could include providing your social security number, pay stubs and bank statements. The lender will pull these reports from three major credit-reporting agencies in order to assess whether you meet eligibility.
Most lenders require that your housing costs (including mortgage payments, property taxes and homeowners insurance) do not consume more than 28 percent of your gross monthly income. Furthermore, they want to guarantee that total debt payments such as credit cards, student loans, car notes or other obligations don’t make up more than 36 percent of your earnings.
Another critical factor that may determine your eligibility for pre-approval is your debt-to-income ratio, which is calculated by dividing all minimum debt payments by gross monthly income. Typically, the highest DTI you can have is 50%.
In addition to your debt-to-income ratio, a good mortgage lender will also take into account your credit score. Your credit score has an impact on both the interest rate and loan amount available to you; thus, it’s essential that you have good credit before applying for a home loan.
While credit-worthy lenders can help determine your affordability, it’s always wise to shop around. You can do this by reading reviews online or asking friends and family for recommendations.
2. Youll Save Time
Pre-approval for your home loan can expedite the mortgage process and give you leverage when negotiating. Furthermore, having a pre-approval letter shows that you are serious about buying a house and are eager to begin negotiations.
Preapproval for a home loan typically involves providing information about your credit history, income, down payment funds and more to a lender. After reviewing this data, they may then determine your eligibility and pre-approve you for an amount specified in writing.
Once approved, your loan file will be forwarded to a loan underwriter who will inspect all documentation and confirm you meet the borrower guidelines for the program in question. After they’ve reviewed everything, final loan approval will take place during home appraisal.
Another advantage of being pre-approved is that you’ll know what price point you can afford. This helps alleviate the stress and frustration of falling in love with a home that is out of your price range.
Additionally, having a realistic home price point will save time and make the search for your ideal house more efficient. By eliminating homes that are too costly, you’ll get an accurate idea of what type of mortgage payment you can afford each month.
Pre-approval can provide you with an accurate assessment of what your mortgage payments may look like, especially if you’re thinking about purchasing a condo or townhome. Your down payment, loan term, property taxes, homeowners insurance and interest rate all play into creating this payment figure. Utilize our mortgage affordability calculator to get an estimate for potential monthly housing expenses.
3. Youll Be in a Better Position to Negotiate
Pre-approving for your home loan is an excellent way to ensure you’re in a strong position when negotiating with a seller. It gives you an advantage over those without such financing, which could help you quickly secure the house of your dreams.
By including a letter of preapproval with your offer, sellers are likely to take you more seriously and consider you more serious when there are multiple offers on a property or when there’s intense competition in the market. Furthermore, having this document handy gives you additional negotiating leverage during times when there are multiple offers or an intense bidding war takes place.
A preapproval letter can help you focus your search, so that you don’t waste time looking at homes that are out of your price range. The lender will provide an itemized estimate of the monthly mortgage payment, interest rate and closing costs associated with each home you’re considering, so you can quickly assess if you can afford it.
If you’re not content with your initial preapproval amount, don’t be afraid to request more. Your credit score could have improved significantly or if you can demonstrate that you are making timely payments on debt, lenders might be willing to grant a larger mortgage loan amount.
If you want to increase the loan amount, consider using our free home monthly payment calculator to experiment with different values and get an idea of what you can afford in terms of monthly mortgage payments. Then, work with your lender to identify the maximum mortgage amount that fits within your budget.
4. Youll Save Money on Closing Costs
Pre-approval is one of the most essential steps you can take when searching for a new house. Once approved, your lender will issue you with a preapproval letter outlining your mortgage amount, interest rate and closing costs. This letter serves as an important guideline since it determines how much house you can afford and guarantees that when house hunting, only homes within your price range will be considered.
Even with a preapproval, you’ll still have to pay closing costs when closing on your new home. The amount of these fees varies depending on the type of mortgage and where you live; however, they typically range from 3 to 6 percent of total loan amount.
At least three business days prior to closing on your home, be sure to get a comprehensive list of closing costs from your lender. This document, known as a Closing Disclosure, will include all fees required at the conclusion of the process.
Comparing closing costs from different lenders can be beneficial to determine how much money you can save. To do this, request a Good Faith Estimate from each lender.
Once you have an estimate, carefully examine it to identify any fees that weren’t included in the original quote. Doing this can help avoid overpaying for services that weren’t included and guarantee your closing costs are as low as possible.
Saving money on closing costs requires comparison shopping and negotiation with your lender. But if you’re willing to put in extra effort, the rewards could be immense in the long run.
5. Youll Be in a Better Position to Buy
Pre-approving for your home loan is an essential first step. It will give you insight into what you can afford, save time when searching for a property and put you in a stronger negotiating position when the time comes to close the deal.
Pre-approval is different than pre-qualification, which provides an estimate of what lenders might approve you for. With pre-approval, however, you have a reliable estimate of how much money you can borrow. Plus, it provides both you and your real estate agent with a starting point when searching for a house.
Within three business days of receiving your completed mortgage application, a lender will provide you with an estimated loan amount, terms and type of loan, interest rate, estimated payments and closing costs. Furthermore, the estimate includes property taxes and homeowners insurance costs, as well as any special features such as balloon payment or early prepayment penalty fees.
It is your responsibility to verify this estimate is correct and corresponds with your actual finances. If not, speak to your lender and inquire what adjustments need to be made.
Additionally, this will give you a clear idea of how much money is necessary to save for a down payment and closing costs. With an informed budget in place, it will be much easier to set realistic expectations and avoid falling in love with homes that are beyond your means.
By improving your credit score, you’ll give yourself an advantage when making an offer on a home. By working towards fixing issues such as decreasing debt-to-income ratio, saving more for down payment or correcting inaccuracies on your report, you’ll know exactly what needs to be done.