When we meet home buyers for the first time we like to make sure they aren’t setting themselves up for disappointment when it comes to the price range they are looking in and that they understand the full process of buying a home today. Many only want to do personal calculations but it’s important they speak to a mortgage professional to receive a pre-approval to verify what they can actually afford. This is vital today because the standards and restrictions have increased and appears to change constantly. There isn’t a way to both figure out what you think you can afford and what a bank/lending institution will loan you without talking to a professional.

The last thing Bob and I want to have happen is for buyers to start looking in the $500,000 range and fall in love with what those homes have to offer, only to find out later they can comfortably afford to stay in a maximum range of say $375,000.  Note, I said ‘comfortably’ because after the mortgage professional tells you the range you can afford, you must then decide the range you want to comfortably afford. What is the monthly expense you can handle?  You might can afford up to $300,000 but are comfortable at the $200,000 payment level with a maximum $9,000 in taxes.

Not doing this work up front, may set everyone up for failure later because you will no longer be happy with what is found in the lower price range. You will always feel like you’re settling. Every property will be compared to the ones found in the higher range and will fall short. Then you will get a sense of ‘settling’, which in reality is not the case.

Before you get too far in your search review the information below, which I discussed with a mortgage professional. Contact a mortgage professional who will take time and discuss your options face-to-face or over the phone.

ANSWERS TO COMMON MORTGAGE QUESTIONS

(My Q&A with a mortgage consultant)

Q1. Please clear up the confusion many buyers have and explain the difference between a pre-qualification and a pre-approval letter.

A1.  A pre-qualification is informal and less detailed than a pre-approval.  You basically have a conversation with a mortgage person and they ask you about your finances, credit and employment and they give you a letter stating that you pre-qualify for a loan. This can lead to a situation where something later in the process comes to light that can cause a headache for the potential client or even a decline in obtaining the mortgage.

A pre-approval is given when the mortgage originator reviews an actual credit report for the client and asks more in depth questions about their employment, assets, salary i.e. bonus, overtime, etc.  This gives a much more reliable approval, which in turn makes for a smoother process when you find a home and get a contract on a property.  The loan is more likely to perform and the client is more likely to close on the home.

Q2. Why is it so important, especially in today’s market, for buyers to have a thorough discussion with a mortgage loan officer to obtain a pre-approval before seriously starting their home search?

A2.  It is now more important than ever before to have an in-depth conversation with a mortgage person before looking. The scrutiny all lenders are under is more intense and more demanding than ever before.  When mortgage standards were more relaxed lenders had the ability to change a person’s loan from one program to another when the initial program didn’t work. Now many of the options that were available then are no longer available or carry higher criteria to qualify and the customer can be left in a situation where they have made arrangements to move, put money down on a home and canceled an existing lease only to find out they don’t qualify and there isn’t a more lenient product they can use to secure their mortgage and still close on the home.

Q3. What’s the difference between a pre-approval, pre-commitment and a commitment letter?

A3.  A pre-approval is an in-depth interview by a mortgage person where they review a person’s situation and go over a credit report and issue a letter that states if the person can provide the documentation that confirms all the information they gave verbally then they are approved for the loan.

A pre-commitment would be the person gets the pre-approval and then provides the documentation that verifies their income, assets, credit and employment and the lender reviews those documents and gives a letter stating that the documents were reviewed and the customer is ready to buy the home assuming a good appraisal and no legal issues interfere with the loan.

A commitment letter is a letter that states everything is done and the buyers are ready to purchase the home.  Meaning all the client’s information has been reviewed and approved by the lender and all the related items pertaining to the home (title search, appraisal, etc.) have been reviewed and approved.  This typically is the final piece in the mortgage process prior to the actual closing on the home.

Q4. Is it really worth the time and effort to get a pre-commitment if you’re serious about buying now?

A4. A strong pre-approval is typically sufficient because much of the information to do the pre- commitment expires while you look for a home. So that step isn’t necessary but to make sure you get a strong pre-approval just have your bank statements, paystubs, and W2s ready to review with your mortgage person and make sure you mention anything out of the ordinary that you can think of. 

For example,

 

• Did you receive a pay increase in the last two years? 
• Was your income structure different in the past two years?  
• Did you receive a bonus? 
• How much was the bonus year over year? 
• Were you unemployed at any time? 
• Was there a gap between employers? 
• Did your bonus decrease from one year to the next? 
• Have you acquired any percentage of a business during the last two years? 
• Were there any irregularities on your tax return for the past two years? 
• Are there any unusual deposits into your account in the last two years?

 

A good mortgage person should recognize these trouble areas and work to help you get to the bottom of these items to ensure a smooth mortgage process.

Q5. Can buyers get a pre-approval with one bank, but then get their mortgage with another bank?

A5.  Buyers can absolutely get their pre-approval at one bank and then decide to use another bank to obtain the mortgage. That is perfectly fine and happens all the time in the mortgage business.

I hope this information was useful as you begin your home buying process. We are always here to help you find your perfect home, and do our best to provide you with as much pertinent information as possible to empower you through your decision-making every step of the way.