When you purchase a home, you will go through a process of negotiating various terms of the sale with the seller. These terms can include the purchase price, seller concessions (such as if the seller will pay any closing costs), inclusions/exclusions, etc. If you are purchasing the home with cash, the seller doesn’t have to worry about the deal falling through due to you not being able to secure financing. Therefore, the seller would prefer to deal with you (the cash buyer) versus someone without a guarantee of funds. Understandably, most people do not have enough cash to purchase a home and need to borrow.
If you must take out a loan for a home purchase, how do you put the seller’s mind at ease and get them to negotiate seriously with you? Answer: you come to the table with financing already secured. If you have a loan commitment, you will have more negotiating power and will be more likely to purchase the home you want.
In order to be pre-approved for a mortgage you will sign the 1003 application, supply proper documentation (W2, pay stubs, bank statements, etc.), and have your lender or broker submit your file to an underwriter. Once your file is fully approved, you can obtain a loan commitment letter. Now you are ready to begin negotiating with a seller.
But let’s say you are just beginning to ponder whether or not you want to buy a home. You don’t want to go through the loan application process; you just want to see if you could qualify for a loan. If so, you want to know how big of a loan you could afford. In this instance you will want to talk with an honest and ethical mortgage professional about pre-qualifying for a loan.
The process of being pre-qualified is very simple. Your lender or broker will look at your credit report, talk to you about your job and income, and visit with you about what mortgage payment you would feel comfortable paying. Your FICO score, current debt load, and income will all be taken into consideration for calculating what size loan you can afford. This amount is technically what you can afford on paper. You maybe aren’t comfortable with the full amount, so it is important to discuss this with your lender or broker.
A pre-qualification is simply a calculation that determines the maximum loan amount for which you will likely be approved. The experience and professionalism of the person who you are working with is important, as it will help the pre-qualification numbers be more accurate. Keep in mind, by pre-qualifying for a loan you are not approved, there is no loan commitment, and you may be denied a loan when the specifics of your situation are explored deeper. When you pre-qualify, you should ask your lender or broker if they based their figures on fixed rates, adjustable rates, interest only payments, or other more complex loans. You want to be able to afford your home today, next year, and five years from now.
Pre-qualification is a good first step when you are wondering if you can afford to purchase a new home. It will arm you with a little bit of information that can help you decide whether or not purchasing is right for you at the present time. Pre-approval is the next step once you have decided that you can afford to purchase and you are ready to begin seriously shopping for a home. Choose your mortgage professional wisely; make sure you are dealing with an experienced, honest and ethical professional.