by Phillip B. Burum, Executive Vice President, Diversified Pacific,
President, Building Industry Association (BIA) Baldy View Chapter
Notwithstanding the fact that it is nearly 80 degrees outside, it is the middle of winter and the time of year that many start planning for their big summer move. Moms and dads all over the IE start thinking about school districts, local crime rates and nearby shopping conveniences as they drive neighborhoods in search of their next home. However, before you start down the path of selecting your dream home in your ideal neighborhood, the most important step you need to take is to get pre-qualified and/or pre-approved for a mortgage.
The pre-qualification and pre-approval processes will give you and your lender a far more precise picture of your finances and help you pick the best possible home for your investment. Having a pre-approved loan in hand will also help when home sellers are evaluating your offer to purchase. Pre-qualification and pre-approval are similar but different procedures with very different purposes:
Pre-Qualification is the initial step in the mortgage process. A mortgage loan pre-qualification is merely an estimate of how much house you can afford and how much money a lender would be willing to loan you. This is a simple calculation of income versus current debt and other financial obligations to establish a target purchase price range for you to consider. Pre-qualification does not typically entail a detailed analysis of your credit report or ability to purchase a home. This process is also a great opportunity to learn more about the different loan opportunities that are available from the lender. Take the time to ask questions. The internet mortgage companies will offer you great opportunities and provide some of the most competitive rates and fees available but, as you are choosing your lender, do not discount the value of sitting across the desk from someone and walking through the details of all available options.
Pre-Approval offers a tentative commitment from a specific lender for mortgage funding. A loan pre-approval entails a much more thorough analysis of your financial picture. Unlike pre-qualification, pre-approval requires that you fill out a mortgage application and provide all of the necessary documentation for the lender to perform an extensive financial background check and to analyze your current credit rating. During this process, your lender will be able to determine the specific mortgage amount for which you will be approved and give you a better idea of the interest rate you’ll be paying.
Upon your approval, your lender will provide you with a written conditional commitment for a specific loan amount to help you shop for a home at or below a certain price point. This will help facilitate the sale because it lets the seller know that you are ready to move forward and have the cash commitment to do so.
Keep in mind that a pre-approval is not a guarantee that you will be approved for a specific mortgage or home purchase. The loan will be contingent upon concluding that no significant changes in your credit have occurred as well as confirmation of details of the home you are purchasing being proven out by independent third parties. The home will need to be appraised to confirm that it is worth what you have offered. A title search will be needed to verify the new loan can be property insured and if you are buying a resale, lenders will require a home inspection report to verify the physical condition of the home. Pre-approvals are also not binding for the buyer, which means you can still obtain a mortgage from a different lender.
As I noted in a previous column, stick to your budget. A pre-approval or pre-qualification should not be taken as a suggestion. The amount that you and your lender come up with should be strictly adhered to while searching for your home. Buying more house than you can comfortably afford will only cause undue stress and set you up for financial failure in the long run. Your home is out there, you just need to find the one that makes sense for you and your family. Before you proceed on your whirlwind tour of homes, talk to a lender. Make an honest assessment of what you can afford, obtain your pre-approval and stay disciplined.
The BIA Baldy View Chapter seeks to advance the opportunity to attain the American Dream of home ownership. For additional information on homebuying, home improvements or the benefits of homeownership, go to www.biabuild.com on the web.