I’m a young agent in the mortgage industry and because of this many of my clients are young first time home buyers. I’m often asked to complete pre-approvals for first time home buyers to help them determine what they can afford. This has given me a unique perspective in understanding on how young people view pre-approvals.
The entire mortgage process can be lengthy and at times frustrating; however, working with a reputable mortgage agent can help make the process more organized and less stressful. I like to break the mortgage journey into steps which allows the client to focus on one task at a time which helps make the process clearer. I could describe each step in detail but you would end up reading a book and not a blog, so I’ll start simply and focus on one step at a time. The first step in helping my clients (first time home buyer or repeat home buyers) purchase a house is evaluating how much they can afford. This is done through a pre-approval. In my experience, most people have a general idea of what a pre-approval is but they don’t always understand the steps involved and how important it is. Pre-approvals are extremely beneficial because of two main reasons; estimated price range and rate holds.
When you decide to enter the housing market, you can’t just start looking at any home. Obviously, the housing market has different price ranges and you could potentially get into a risky situation if your offer gets accepted on a house that you can’t ultimately afford. Lucky for you, you’re reading my blog and you’ll see that getting pre-approved before the house hunting process starts is the smartest move. When you reach out to me for a pre-approval I look at three main things: income, down payment and credit.
By providing a few income documents I can see what you can afford from a monthly payment perspective and I’ll make sure your debt to income ratios would be acceptable to a lender. After considering your income, a picture of the loan amount starts to come together.
An estimation for a down payment is added to the loan amount to see the potential purchase price (mortgage loan + down payment) . It also determines what type of loan you could possibly get: high ratio (less than 20%, insurance premium), insurable (over 20%, max 25 year amortization) and uninsurable (over 20%, max 30 year amortization). A lot more goes into the types of loans listed above but I’ll leave that for a different blog. The down payment could come from a variety of sources (savings, equity, gifts etc..)
Pulling credit is the final stage of the pre approval. It provides an overview of the client’s ability to pay off previous or current loans. Credit can be confusing and i’m going to cover this at a different time but if you have any questions about credit please feel free to reach out. Generally, a credit score of 650 or higher is usually acceptable; however, exceptions can be made depending on the lender or the equity that the client has.
Once the income, down payment and credit are identified, a mortgage amount that is affordable and that the lenders will most likely approve will be estimated. This pre-approval number is not 100% guaranteed as anything could happen from that time to an actually approval date. A pre-approval is simply a snapshot of your current situation. Thats why it’s important to not change jobs, take on new debt and spend large sums of money unnecessarily. We will then submit that information to a lender for a pre-approval letter (almost every lender will give a letter). It’s an automated system so the letter is received relatively quick as a computer system trusts the information that was imputed. Once a pre approval letter is received the client gets a rate hold.
If you’re shopping for a home, or have worked with a mortgage professional in the past, you’ve most likely heard of rate holds before. If not, it is something that every potential homeowner should be aware of. If you are not familiar with the term, a ‘rate hold’ refers to locking in a specific mortgage rate for a limited period of time. This is offered through most lenders, assuming you are a potential client looking to purchase a home and need a mortgage.
If you qualify for a rate hold, there are a few things you should know – from restrictions to benefits! The first and most important is that rate holds are typically only offered for a period of 90-120 days. So, once you have created your mortgage application with a broker and submitted it at the interest rate that best suits you, that rate will be protected for 90-120 days while you shop.
A rate hold is not a commitment. It does not force you to work with that specific lender. It also does not affect your future chances of receiving approval down the road. This can be truly beneficial in volatile markets or those with high competition. If you submit your application to a lender for a fixed rate of 2.49% on a five year term, but while you are searching for your perfect home that rate moves up to 2.99%, the rate hold will protect you and allow you to still sign at 2.49%. This can mean huge savings!
Another benefit is that, if the rates go down, it does not stop you from taking advantage of the lower offer. Instead, it protects you from rate increases after you’ve determined your budget and are in the process of purchasing a home. It is also important to note that, once the rate hold expires after 90-120 days, there is nothing stopping you from submitting another rate hold. It will just be subject to the interest rates as they stand on the day of submission.
I hope this information of pre approvals helped your understanding. I will be posting weekly blogs about the mortgage world!