A strong pre-approval letter can make all the difference in having your offer accepted.
- Complete the Buyer’s Worksheet.
- Consider what type of loan will be best for you.
- Contact us for a pre-approval, or apply online.
A strong pre-approval letter can make all the difference in having your offer accepted.
If you are seriously considering purchasing a new home, you’ll want to get pre-approved. When you are pre-approved, a lender has made a firm commitment to provide mortgage financing for your home purchase.
In a competitive real estate market, a strong pre-approval letter can make the difference in having your offer accepted over competing offers, even ones at a higher price. If you are pre-approved, the purchase process is much smoother, and you will be much more comfortable meeting the necessary timelines.
The pre-approval process determines the maximum purchase price you can afford based upon your down payment, your financial qualifications, and the underwriting guidelines for the loan program you have chosen. You may qualify for a purchase price that gives you a monthly payment that is more than you feel that you can comfortably afford. Decide on a payment you are comfortable with, including property taxes and homeowner’s insurance and/or association dues, and factoring in the tax advantages of buying. Then work with your lender to determine what size mortgage—and what price home—you qualify for.
The pre-approval process is very important. The price of the home you can afford, the size of the mortgage for which you can qualify, and the amount of the down payment you will need may vary dramatically depending not only on interest rates, but also on the loan program and lender you choose. It is critical to do your homework, ask a lot of questions, and understand your options. You may be able to buy a more expensive house than you thought possible, but you don’t want the trade-off to be a mortgage that leaves you financially strapped, or with less equity than you started with.
The pre-approval process begins with taking the steps outlined in How do I shop for a mortgage? and Which is the best loan for me? You need to find the right lender and understand which loan program best meets your financial needs and goals. Once you have identified your lender, read What does a lender need to qualify me and provide an accurate quote? and fill out the Buyer’s Worksheet. This is the information a lender needs to pre-approve you, and to work with you on finding the best loan for your situation.
The lender uses the pre-approval process to determine the maximum monthly mortgage payment for which you qualify. Your lender then takes that payment amount, the interest rate for the loan you have chosen, and your down payment, and determines your maximum purchase price.
Again, it is very important to remember that you may qualify for a mortgage payment that is much higher than you feel that you can comfortably afford. Or, you may qualify using a loan program—negative amortization, for example—that has features that you don’t like. This is why understanding the process is so important.
Your qualifying payment is derived from the debt-to-income ratio allowed on the loan program you have chosen. If the lender will not permit a debt-to-income ratio higher than 38%, then the monthly payments on your housing debt, revolving debt, and installment debt could not exceed 38% of your gross (pre-tax) monthly income. What makes the pre-approval process seem confusing is that the allowable debt-to-income ratio can vary dramatically between lenders and loan programs. You may find that you can qualify for a far bigger mortgage from one lender than from another; or that the information from a lender is very different than that from an online mortgage calculator.
A borrower who has good credit, can document their income, and is putting down 20% or more may be allowed a debt-to-income ratio of over 50%. Lenders will sometimes make exceptions for compensating factors such as substantial liquid reserves and/or excellent credit.
Another important variable is the interest rate that the lender will use to qualify you. This interest rate will vary among lenders and different loan types, and can change quickly if rates are rising or falling. If you are looking for a hybrid loan, you will be qualified based on the mortgage payment at the loan’s starting interest rate. On an adjustable rate mortgage, or ARM, the payment used to qualify you is based on an interest rate that is usually higher than the start rate of the loan, but lower than prevailing fixed rates, and varies from loan program to loan program. Also, many people choose an interest-only loan because the lower payment allows them to qualify for a larger mortgage.
The lower the monthly payment used to qualify you, the higher the purchase price you will be pre-approved for. Many people choose a hybrid interest-only loan because they will be qualified using a lower payment than they would be if they selected a fixed-rate loan and paid principal and interest. This is a more conservative strategy than using an ARM or a negative amortization loan, but still allows you to afford a more expensive home.
