What does a pre-approval mean?
Getting pre-approved allows you to confidently understand what you can actually afford. It does not lock you into a specific lender and you should review offers from both your pre-approval lender and competing lenders before you actually lock in your loan.
Essentially pre-approval provides the buyer (you) with a guaranteed (providing situations and circumstances do not change) loan amount, a monetary figure of how much home you can realistically afford to purchase, therefore, you’ll be able to save time by not visiting homes that are beyond your reach financially, and have a better idea of your home buying budget and mortgage costs associated with the purchase.
Being pre-approved for a mortgage by a lender is an important part of any home-buying journey because it provides you with a strong negotiating tool. A pre-approval letter shows the seller that you are serious about buying a home. Often, simply having this letter can help project you to the head of the negotiating line.
Does Being Pre-Approved for a Loan Commit You to Using That Lender?
Even though you might be pre-approved for a loan through one lender, it does not mean that you are locked into using that lender. In fact, you should seek at least three different offers from three different lenders using the pre-approval letter from one to see if one of the others can provide a better loan offer.
Getting Pre-Approved by a Lender
If you are thinking about buying a home, then you should start getting ready for the pre-approval process as early as you can – at least six months before you apply. The earlier you start, the more time you will have to improve your credit if need be, and to collect all of your financial documents and any other information you may need.
If you don’t already have one, create a budget so you can get familiar with managing your money as efficiently as possible.
Only apply for a pre-approval with a lender that requires full documentation. This will permit the lender to accurately review your application. The documentation will be needed for the actual loan application anyway, so by providing it to the lender with the pre-approval, you’ll be that much further ahead. Plus, you don’t want to get pre-approved by a lender who doesn’t require documentation because it could very well be a false approval. When applying for a pre-approval, always be sure to disclose everything.
The lender will review your credit reports, your income, and employment history and verify all of the documentation you provided. Once approved, your lender will provide you with a list of the loan programs you qualify for, as well as the maximum loan amount you’re qualified to borrow and the loan’s interest rate.
Applying for a pre-approval is essentially a scaled-down version of what you can expect to go through when you apply for the actual mortgage loan. Therefore, it pays to prepare for the process and to manage it the same way.
Reminder – If you get pre-approved for a loan, it is critical that nothing changes with your credit, income, and employment status between the time of the pre-approval and the closing. The lender is pre-approving you based on your existing circumstances and information. Should something change, you may not get the final loan approval you’re looking for.
Read: Mortgage Pre-Approval
It is essential for a new homebuyer to be fully satisfied with the mortgage they choose. This is because their loan payment will be a significant part of their lives and their finances for the next 15 or 30 years, or at least as long as they choose to remain in the home. Unfortunately, many first-time homebuyers are so excited to be buying their first homes that they get caught up in the process and lose sight of what is important – making sure that the mortgage they have agreed to is right for them.
In this section, we provide everything you need to know when it comes to choosing the right mortgage, including:
- How to Be Sure You are Comfortable With the Mortgage You Choose
- What Is Rate Lock and How Does It Impact Your Mortgage?
- How to Avoid Common Mortgage Pitfalls and Handle Potential Problems
- Making Known Your Intent to Proceed With the Loan
How to Be Sure You Are Comfortable With the Mortgage You Choose
When it comes to choosing a mortgage, there are a number of different questions a buyer needs to ask themselves before they sign on the dotted line. These questions include:
Can I Afford to Repay the Loan?
If you are planning on living in your new home for the extent of the mortgage, you need to seriously consider your current and future finances. Is your job stable enough that you don’t have to worry about losing it at any time during your mortgage’s repayment period? Can you afford to pay the mortgage with one income in the event your partner becomes unemployed? If you are confident in your ability to repay the loan, then you are starting off in a good position.
Am I Comfortable With the Monthly Mortgage Payment?
You need to be able to comfortably manage your monthly mortgage payment. You don’t want to be in a position where the payment puts a lot of pressure on your finances because all it would take is for one thing to happen for your budget to get thrown off course. Just because the bank tells you that you can afford a certain amount doesn’t mean you actually can. Take into consideration all of your expenses and subtract them from your total household income. If the mortgage payment is less than 28% of your income, then you should be able to make that payment comfortably each month.
Am I Confident With the Lender’s Decision?
You have to be confident in the lender you choose. You have to trust that they are working to get you the best rate and terms on your loan. This is why researching lenders before you apply for your loan is so important. If you are hesitant about the lender’s financing decision, then you may want to take a step back and find another lender.
Are There Any Risky Features in My Loan?
Some lenders include language in the mortgage agreement that might not be beneficial to the borrower. Before agreeing to a mortgage offer, make sure it doesn’t include any risky features like prepayment penalties or balloon payments.
Will the Loan’s Principal and Interest Change in the Future?
Most home buyers want the security and peace of mind that comes with having the same payment amount every single month. This is what is known as a fixed-rate loan and this type of mortgage allows the buyer to factor their payment into their budgets because it doesn’t change. But some mortgages, like adjustable rate loans, feature payments that can fluctuate. With these mortgages, the principle remains the same but the interest rate changes. The interest rate can increase or decrease, depending on where the national interest rate is.
When the answers to the above questions are favorable to you, your partner, and the lender, then you can confidently say that the mortgage you have chosen is the right one for you.
What Is Rate Lock and How Does It Impact Your Mortgage?
When you apply for a mortgage, the lender will discuss your loan application’s “rate lock.” A rate lock is essentially a guarantee from the lender that your loan will have a set interest rate for a certain price for a certain period of time. That length of time is typically 30, 60, or 90 days, but the terms could be set lower or higher.
Once a lender locks the rate on your loan, you are guaranteed to have that interest rate as long as you close on the home within the determined length of time. In the event that you are unable to close within the set time period, the rate on your loan will revert to whatever the rate is at the time of your closing.
Pros and Cons of Locking in Your Rate
The benefit of having a locked rate is that you are guaranteed to pay the rate even if interest rates go up. The disadvantage is that should the interest rate drop after you have your rate locked, you won’t be able to get the lower rate on your loan. But, there are some exceptions that may allow you to still get the lower rate.
One such exemption is if your rate lock agreement includes a “float down” provision. This provision permits the loan’s interest rate to be reduced if the rates drop during the locked-in period. The downside to having this provision included, however, is that it can be costly. Another exemption is to have your rate lock agreement re-written so the new, lower rate is included. But, it is also expensive to have this done as well and should the rate stay the same, you could be spending a lot of extra money for no reward.
How to Avoid Common Mortgage Pitfalls and Handle Potential Problems
Buying a home is an exciting time in one’s life, but it is not without its share of risks. To ensure that everything goes as planned, you need to be aware of certain potential problems and pitfalls that could wind up hurting you in the end.
Here is a list of common issues you are going to want to avoid when buying a new home.
Avoid Signing Partially Filled Out or Blank Documents
Never sign any blank document or any document that isn’t properly filled out with the agreed upon terms. Once your signature is on the page, the lender can fill in any blanks with whatever information they want. Make sure this doesn’t happen – only sign completed documents.
Avoid Buying More Home Than You Can Afford
If the lender tells you that you can qualify for a $300,000 loan, it does not mean that you can afford a $300,000 loan. You need to review your income and expenses to find out what you can comfortably afford before you think about applying for the highest loan possible, or else you may find yourself in financial trouble in the near future.
Don’t Think About Refinancing; Focus on Getting the Best Loan Now
One way home buyers convince themselves to buy a home at a higher rate is that they think they can simply refinance it at a lower rate in the future. This is a mistake. Instead of thinking about refinancing when you’re buying a home, focus on getting the best loan you can, right now. Refinancing isn’t cheap and there is no guarantee the interest rates will go down.
Don’t Try to Enhance Your Application With False Information
Some applicants think they can improve their loan approval odds by enhancing their applications with information that proves to be false. An example of this is claiming to make more money than you actually do. Another example is attempting to hide information that might be considered negative. Completing your application with false information is risky because it could make you guilty of mortgage fraud. Therefore, complete the application truthfully and you’ll avoid a potential legal situation.
Additional Potential Problems You May Run Into
Not all mortgage problems are the fault of the borrower. In fact, there are several reasons why a lender might prove problematic for the home buyer. Such examples include:
- Predatory Practices
- Illegitimate programs offered by the lender
Should you come across a lender who exhibits any of the above, then you should file a complaint against that mortgage company. You can file complaints with each of the following:
- The Better Business Bureau
- Your State Regulatory Board
- Your State’s Attorney General Office
- The U.S. Department of Housing and Urban Development (HUD)
- The Federal Reserve (if the lender is a bank)
- The Federal Bureau of Investigations (FBI) (if the lender is committing fraud)
Making Known Your Intent to Proceed With the Loan
Before your mortgage lender will more forward with the loan approval process, you first have to inform the lender of your “intent to proceed with the loan.” This is done by signing and submitting a Notice of Intent to Proceed with Loan Application (NIPLA) document. By signing this document, you are accepting the terms and fees listed in the Good Faith Estimate (GFE) and permitting the lender to proceed with the approval process and charge you the fees related to your loan processing.