by Michael Paul, Managing Partner, Direct Mortgage Loans, LLC
In most purchases we make, knowing how much we can afford is usually the first step in the buying process. Buying a new car, finding the right college or even that new set of golf clubs – all require knowing how much you can spend. So there is good reason that when buying a new home, historically the largest purchase you will make, knowing how much home you can afford is the starting point.
If you’re working with a Realtor, or starting the search on your own, your first step needs to be getting pre-qualified for a mortgage. Today’s competitive real estate market and more rigorous credit requirements demand that you’re ready make a serious offer. Getting pre-qualified can save you time, money and disappointment.
So what is pre-qualification and how does it differ from pre-approval?
Pre-qualification does not mean you will get the loan. A lender is simply making an estimate based on the financial information you provide. Pre-qualification is the initial step in the loan application process. You will need to provide proof of employment, income, tax history and a credit report. It can help to show your success in managing bills and other loans. Most pre-qualification can be done over the phone or by email and there is no cost to you to gather and process this information.
Once this information is processed, it will allow the lender to better discuss the goals you have and recommend the types of mortgage products that best suit your needs. Pre-qualification allows you, your realtor and the lender to be on the same page for your home search. But remember, pre-qualification is not pre-approval – it is simply gathering the right information to direct your home buying search and to estimate your top-end purchase price.
Getting pre-approval is the next step in the process. Pre-approval is earned when you complete the lender’s mortgage application. The application process involves supplying documentation for all of the answers you provided in the pre-qualification process – plus an analysis of your credit history. Upon review of the application and “approval”you will know the exact amount of the mortgage you can borrow and the exact purchase price of the home you’ll be searching for. The approval carries a written lender commitment and an interest rate that can be locked in for a period of time.
So why should you be Pre-qualified and Pre-approved for your home search?
- The most important reason – knowing how much home you can afford. This makes your search more realistic and helps your Realtor provide homes that meet your needs and your monthly budget.
- Being pre-qualified and pre-approved gives you a definite advantage over others writing a contract on the same house. Your offer will be strategic because you know how far you can go if offers increase. You may actually be able to offer a lower price knowing that you’re pre-approved. With pre-approval, you are a better negotiator.
- Buying decisions happen fast, especially for desirable properties. With your pre-approval in hand you are a step ahead of other buyers. While other buyers are scrambling to get a mortgage, your contract is more attractive to the seller – making them more likely to say yes to your offer. Sellers pay closer attention to offers that include lender pre-qualification and pre-approval letters.
- For first time home buyers, pre-qualification can help “educate”what makes up the actual monthly mortgage payment: closing costs, insurance and escrow fees all contribute to the monthly payment.
- Getting pre-qualified gives you the opportunity to get to know your lender. You will be working with them from pre-qualification through closing, so having a strong working relationship is an important part of the home buying process. Your lender is a key person on your home buying team.
It’s said that a solid start yields a desirable outcome. Take the advice of real estate and mortgage professionals and arm yourself with the most powerful tool in the home buying process – pre-qualification and pre-approval. Then get out there and find the best home on the market and make a confident offer. Before you know it you’ll be unpacking boxes in your new home.
Direct Mortgage Loans is a privately owned and operated licensed direct mortgage lender located in Hunt Valley, Maryland. The experience of our loan originators, processors and underwriting staff has built a business known for integrity, respect and responsibility. Direct Mortgage Loans was named one of Baltimore’s Top Workplaces 2013 by The Baltimore Sun. An Equal Housing Lender. National Mortgage Licensing System # 832799
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