Before you start shopping for a home, the No. 1 piece of advice for homebuyers in today's market is to get a mortgage preapproval. While a mortgage preapproval doesn't guarantee a loan, or that you'll find a home you want to buy, it does provide you with:
- How much mortgage you can borrow
- Your estimated monthly payment
- Documented proof to a seller that you can qualify for financing
"You wouldn't go to the grocery store without your wallet and you shouldn't shop for a home without a preapproval for a mortgage," says Dominic Turano, branch manager for First Home Mortgage in Washington, D.C.
Turano says most Realtors won't discuss properties with you until you have a mortgage preapproval.
What's the difference between preapproval and prequalification?
Getting prequalified is the first step toward a preapproval. A prequalification can be done by anyone -- your Realtor or mortgage associate can run one on you, or you can even run one yourself. This is done to produce a working price range for homes you can likely afford. A prequalification will produce a ballpark estimate of how much mortgage your income will support.
"When you prequalify someone for a loan," says Aiman Abozeid, branch manager for Inlanta Mortgage in Madison, Wisc., your loan originator will check three things:
- Your credit
- Your income
- Your down payment
"If your credit is acceptable, a lender can give you a prequalification and an idea of the amount you can borrow," he says.
A preapproval takes this a step further. Usually, you will actually submit a mortgage application with your lender and then provide some basic income, asset, and debt documentation. You'll also generally pay a fee to the lender that will cover pulling your credit report and the cost of an appraisal if you find a house to buy.
The lender or broker will then run your financial information through an automated underwriting system that checks your credit and debt-to-income ratio and generates a preapproval letter if you qualify. This is also known as issuing you a "conditional commitment." However, a key missing element in the transaction is the return of a satisfactory appraisal on a house that you have signed a contract to buy -- and updates to any documents you're provided.
Discuss loan options with your lender
Turano says a good lender will ask a lot of questions during preapproval about your budget and your cash availability in order to offer some guidance on loan programs.
"Even within a 30-year fixed-rate loan program there are lots of options for FHA, VA, and conventional loans," says Turano.
Turano provides borrowers with a maximum loan amount including estimated closing costs and monthly payments based on the projected down payment.
"I educate borrowers on the merits of various loan programs and run through different scenarios based on what they feel they can afford for their cash investment and their monthly payments," says Peter Boyle, a senior loan originator at Summit Mortgage in Plymouth, Minn.
Prepare for future financial challenges
While the lender can provide you with a maximum mortgage amount that your income will support, you should also consider how much mortgage debt you are comfortable handling. It's a good idea to keep in mind that there will be other and unexpected costs of owning a home, and stretching to borrow every last dollar for your mortgage could leave you unprepared for future financial challenges.
