Buying a home is one of the biggest financial commitments anyone can make. Knowing where to start can be daunting. On Evergreen Insights, we want to arm readers with knowledge through a regular ‘Mortgage 101’ series. Whether you’re thinking about buying your first home or you are a move-up buyer and simply need a refresher on the process, this series will keep you up-to-date on new information and trends – and show the basics.
Before you even start to look for your new dream home, determine what you can afford and which mortgage product is right for you. This way, you won’t be disappointed when you find that perfect home, where you’ve envisioned yourself living, only to later find out this home is outside of your budget. In competitive markets it’s important to know your home-buying limits by doing some work ahead of time in order to make an offer on a home from the strongest financial position possible. Stated another way, failure to do some work ahead of time puts you at a competitive disadvantage against other homebuyers.
There are two processes employed by the mortgage industry to determine your home-buying power: prequalification and preapproval. Prequalification is a cursory examination of your financial position based on information you provide whereby the lender provides you with an opinion of which financing options you might qualify for. Since the lender has not verified your financial information (such as your income, your assets for the down payment, or your credit history), prequalification is not very well received by home sellers and real estate agents.
Preapproval involves formally applying for financing as well as providing your lender with documentation of your financial position. After reviewing this information, the lender is then in a position to issue a commitment for financing based on specified terms such as the maximum loan amount and the type of financing. Typically the lender’s commitment is subject to a variety of conditions, such as an acceptable appraisal and clear title report for the home you ultimately purchase. The lender may also ask for additional personal financial documents to clarify any questions. Going the extra step to get preapproved by a reputable lender can provide you with an advantage as you compete with other homebuyers interested in the same home. Preapproval shows the seller you are serious about buying a home and gives the seller a level of confidence that you will successfully purchase their home.
Taking a few easy upfront steps can take some of the stress out of the home-buying process, and put you that much closer to your dream home.