Confused About Pre-Approvals? Follow These Three Steps

So, you’re buying your dream home. First and foremost, that’s a great decision. It’s a smart investment; it’s a long term investment; and at the end of the day, for most people owning is better than renting. So, you’ve made a decision and it now comes down to the pre-approval process.

Pre-approval is a very important and critical step. It’s important to do that and make that the first step, prior to looking at any homes. Pre-approval is a critical step because what pre-approval allows you to do is to determine if you’re able to buy. It’s essentially important to get pre-approved before you begin looking for your dream home. Confused about pre-approvals? There are a few things to understand and get in order. You may follow these three steps to ensure that you get the home loan that’s right for you.

Step 1: Determine what you can afford. Being assured by a lender that you’re approved to borrow a definite amount doesn’t mean you can afford the sum. There are lenders known for offering larger loans than borrowers can afford despite laws that hold lenders more accountable than before the housing crisis. How will you know what you can actually afford?

• Look at what you’re currently paying for housing and try to stick as close to it as possible.
• Look at the whole picture and calculate the true expense by combining the principal, interest, taxes, and insurance. You may also need to factor in an additional payment per month for insurance.

Step 2: Know what you’ll need to provide. A lender will ask simple questions about your income, assets, and debt in order to qualify you. A pre-approval means that you’re offered a particular loan amount so it’s a little more serious and comes with an application fee. Your debt-to-income ratio will be considered by the lender, including your ability to repay the loan. They’ll run a credit check and require you to submit a list of financial documents.

Step 3: Get your finances in shape. Work on anything that’s below standard once you know what a lender will be looking for. Lenders look for job stability so if you’re looking to do a career move, consider staying put for now to help improve your loan terms.

Also, have you taken on any new credit accounts or loans, or closed old accounts? Getting a bunch of credit cards even if your intention was just to grab those sign up bonuses is still considered a recent shift in credit which can affect your debt and perceived financial stability.

Lastly, look at your credit report and score to determine whether you might have trouble qualifying or you’re in the sweet spot for the best interest rates. Making payments on time and paying off credit card balance each month are simple things to do but can improve your score and save thousands of dollars in interest over the term of the loan. You should be aware that this process takes time so don’t expect to pay off the balance and expect your score to be projected comparable to someone’s who’s always paid off their credit card balances for years.

Author: Shane