I use to have a real estate license before I became a full time writer. Taking clients to see homes I knew was beyond their means became very distasteful to me. Some real estate broker’s will tell you that how a person pays for the home is not an agent’s problem. I think it is the real estate agent’s responsibility to steer their client’s toward homes they can afford, not want, and getting them pre-approved for a loan is the first step.
What Is Pre- Approval?
Pre-Approval to purchase a home means getting loan approval from a lending institution before you ever start house hunting. You will fill out a loan application and the lending institution will gather information from your credit report, your employer and from other places that you owe money to.
If you are pre-approved for a home loan, the lending institution will tell you just how much they will lend you, how much you will need down and what the monthly payments will be. They determine this by your debt to income ratio, among other things.
Just because the lending institution thinks you can afford X amount of dollars and a monthly payment of X amount does not really mean that you can. A lot of what you can afford will depend on your lifestyle. They do not take into consideration of how many times you like to eat out every week, or how much gas you burn from pay day to pay day.
Some banking sites have a template to allow you to calculate your own payments as a starting point. You can type in a certain amount for a certain amount of years and it will display the monthly payment amount. If the payment is higher than 1/4th of your monthly income, then you probably need to adjust it down to a lesser over all amount.
For instance, when I purchased my home a few years ago, I went onto my banking site and used their mortgage calculator. I played with the numbers until I had an over all amount that was 1/4th of our monthly income. I knew I could afford that amount for a mortgage payment.
When I called our bank for pre-approval, I told the loan officer that I wanted to borrow X amount of dollars and the payment needed to be a certain amount per month. He called me back with in the hour, telling me that I was pre-approved for several thousand more than I wanted.
I could, in fact, purchase a much nicer home, but the payment would be higher every month too. Was I tempted? No, because I had already established how much I wanted to borrow, and that told me what price range to go house hunting in.
Advantages of a Pre-Approved House Loan
The number one advantage of a pre-approved house loan is that you will only look at houses that fall within a certain range. This will narrow the field and save you time while you are house hunting. You won’t even bother to look at homes that you know you can’t afford.
The lending institution will issue a letter of pre approval. This basically tells the real estate agent you are working with, and the home owners, that you have the money already. This makes the sale a lot faster and smoother. A home owner will be more likely to accept an offer from someone who is pre-approved for the loan, versus someone who doesn’t even know if they can get loan approval.
Pre-Approval Avoids Disappointments
Some people go out house hunting without even knowing if they can get a loan for the amount they need. They will search out certain types of homes without ever considering the cost. They may fall in love with a particular home, place an offer and then go talk to a lending institution; only to find out they cannot get approval for the amount of money they have offered.
They may manage to get approval for the amount and then find out they cannot afford the monthly payments. Either way, the house hunter is disappointed, and they have wasted a lot of their time. Using the mortgage calculator and sticking to a price you can afford will give you a ball park figure to work with.
The first step in house hunting should be getting pre-approval for an amount of money you are comfortable with. Struggling to pay a mortgage that you cannot afford and never should have been approved for, may cause you to loose your home to foreclosure.
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