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Mortgage Pre Approval: Qualifying for a Loan

bluecat | Jul 31, 2009 |

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The mortgage pre approval letter can be a substantial help for first-time home buyers. When you do something for the first time, there are chances that you don't know the possible mistakes and how to avoid them, so your process would go slower and it won't be as smooth as it should.

These are a few considerations to make you understand what are the benefits of a mortgage pre approval:

When searching for a home, if you don't know the maximum amount of money you are qualified to borrow, you may waste a lot of time by visiting houses you can't afford. Even worse, if it happens that you like one of those homes and you decide to buy it, you'll discover that you aren't qualified to get that kind of mortgage, therefore you'd have been already invested a lot of time and maybe some money for nothing.
If you are the conservative kind of person, you may self-evaluate your chances of getting a mortgage too severely, and that would influence the types of homes you're going to search for. This means that you're going to ask your real estate agent to show you only those dwellings that you think you can get approved to get a mortgage for, which may be much lower than your actual buying power. If you can afford better living conditions or a nicer neighborhood, why not take advantage of that? This is why a mortgage preapproval would help you position yourself on the right track in your searches.

The good part of going through a mortgage pre-approval process and obtaining your pre-approval letter is that it doesn't cost you anything. Companies like Wells Fargo, Long and Foster or Lending Tree would give you this letter for free and without further obligations from your side, in case you change your mind about becoming a homeowner. In order to get your letter, you need to provide some information on your personal finance situation and on the type of mortgage you want to get. Take care, in case you just go for a quick assessment only, because that may be based on factors that are too broad, thus leading to a bigger error interval. Such quick evaluations would take into consideration only general factors such as your credit history and the down payment you are willing to give. This is not enough for an accurate estimation. This is the reason why you need to seek for a complete mortgage pre approval and not for this kind of rough evaluation. Another thing to be considered is the PMI, or Private Mortgage Insurance, which you'll most probably be required to have when you get your mortgage. That's normal, because at a future stage of your life, you may become insolvable, so you won't be able to repay your mortgage to the end. The lender wants to get his money back, and having this PMI insurance puts him on the safe side in this respect. If you can't pay, the insurance company would pay it for you. Although some lenders would allow you to cancel this insurance once you've reached a certain level of payments, there's no law to force them to proceed like that, so some of them may choose to ask you for insurance for the whole mortgage period. Issues like this one and probably many others need to be taken into consideration and discussed during your mortgage pre approval process, so you can be sure you've covered all possible future situations and their solutions.

In getting a mortgage pre approval, age doesn't matter. However, you should keep in mind that the older you are, the shorter the loan term will be and the higher your monthly payments will be. If you don't make enough money, you may not obtain the loan, therefore you'll have to reconsider your thoughts and your real estate plans for the future.

When investigating whether or not you are qualifying for a loan, you may want to check it with more than one lender, in order to make sure you don't skip good opportunities for your home purchase. Mortgage approval conditions differ from one company to another, and that's why you have to invest some of your time into this aspect of buying a home. Before contacting those companies, you can use an online mortgage calculator in order to estimate your purchasing power and to play with different variants of mortgage loans.

Having a mortgage pre-approval gives you a significant edge in the negotiations with sellers because the current homeowners won't have to wait until you get your loan approved. Since you've already been through that process, you can conclude the transaction very quickly. This can be crucial for some people who sell their homes because they need cash as soon as possible. If you can help them obtain their money fast, you may even be in the position to negotiate additional discounts. The saying that time is money wasn't invented for nothing. As you can see, time can make the difference between a great deal and an ordinary one.

Usually, a mortgage pre approval is valid for about 60 to 90 days, so you'll have to find your desired home within this timeframe, otherwise you'll have to get another pre approval letter. This is normal, because interest rates may fluctuate, so what's valid today may not be accurate at all in one year's time. Even on shorter terms, in instable periods like the one we've recently crossed with this crisis, your mortgage pre approval may become obsolete by the time you'll actually go for purchasing the house. If you know about such factors that may occur and may influence your financial situation, you should contact the lender who gave you the pre approval letter and ask for an adjustment. This would allow you to avoid a waste of time.

Last but not least, you should know that a mortgage pre approval is not binding the lender in any way. You may have the surprise of getting rejected, despite your perfectly valid pre approval. It's only an evaluation to serve you as a guideline in the home search process and not a binding commitment for either you or the lender.