Shopping for a home before you've been pre-qualified for a mortgage is like putting the cart before the horse. The same can be said about writing a contract to buy a home if you aren't pre-approved for a loan.
First, understand that any lender will want to know where you stand financially, so you should figure this out before you do anything else. You need to determine how much money comes into your household each month-and how much goes out.
Where You Stand
Start by calculating your total monthly gross income, including your regular pay and other sources of "hidden" income: a raise that's due before your first mortgage payment; a history of bonus or overtime income; income from investments and rental property; child support and alimony.
Now calculate your monthly debts: credit cards, student loans, car payments, etc. Do not include monthly household expenses such as utilities, groceries or utility bills.
Next, add up any assets you could use for a down payment: savings, gifts from a relative or friend, stocks and other investments. If you have good credit, some programs allow you to buy a home with no down payment at all. Still, most borrowers make down payments of 5% to 20%.
After compiling all of these numbers, you should have a picture of where you stand financially. The next phase deals with pre-qualification and pre-approval.
Pre-qualification is simply a verbal exchange in which the lender looks at your statement of income and debt, and estimates how much you can afford to borrow, assuming no extenuating circumstances. It's a guideline-not a commitment. With a rough idea of how much you can afford, it's much easier to go home shopping.
When it comes time to actually purchase a home, however, the lender starts verifying all the information on your application and may find some inaccuracies or problems in your credit file, which could delay, even cancel, settlement. Being pre-approved before writing a contract can prevent such headaches.
Loan pre-approval is a commitment from a lender to provide you with a loan for a specified amount. This means the lender has already verified everything on your loan application.
Lenders determine how much you can afford to spend on housing by calculating your debt-to-income ratio. With many loan programs, your monthly mortgage payment, including principal, interest, taxes and insurance (if applicable) cannot exceed 28% of your gross monthly income. That amount combined with the rest of your monthly debts cannot exceed 36%.
If you're in a seller's market, it's important to go the extra step for pre-approval-removing a seller's fears that something may ruin the deal at the last minute. Pre-approval also gives buyers a better negotiating position in a multiple-offer situation. Sellers are more likely to choose pre-approved buyers over buyers who haven't proven they can get a loan.
Your local Sterling Oaks® Real Estate office/agent can refer you to a reputable lender in your area to assist you in learning more about your buying power and to help you get started on the road to home ownership.