If you're planning to buy a home, one of the first steps I recommend is getting properly pre-approved for your mortgage before you start making offers.
I've been helping homebuyers with mortgage financing since 1999, and I don't believe a good pre-approval is simply a letter stating how much someone can borrow.
A proper pre-approval should help answer several important questions:
How much can you reasonably finance?
What will the monthly payment look like?
How much cash will you need?
Which mortgage programs may be appropriate?
Are there potential financing issues that should be addressed before you make an offer?
I'd rather identify a potential problem before you're under contract than discover it after you've signed an Agreement of Sale and committed to a closing date.
— John Madden
Owner, Capital Funding Mortgage Associates
Mortgage Professional Since 1999 | NMLS #960139
A mortgage pre-approval is an evaluation of your financial qualifications for a proposed mortgage.
Depending upon the circumstances, the review can include:
The objective is to determine whether your proposed financing appears to meet applicable lending requirements before you make an offer on a property.
A pre-approval is not a final mortgage approval.
Final approval will depend upon additional factors, including verification of your financial information, the property, appraisal when required, title, underwriting and other loan-specific requirements.
Consumers sometimes hear these terms used interchangeably, but I believe there is an important practical distinction.
A pre-qualification may be based largely on information a borrower provides without a more complete review.
A pre-approval should involve a more meaningful evaluation of the borrower's qualifications.
When you're preparing to make a serious offer on a home, I want your financing reviewed as thoroughly as reasonably possible beforehand.
The strength of a pre-approval isn't determined by how nice the letter looks. It's determined by the work that went into the analysis behind it.
You don't necessarily need a pre-approval before attending an open house.
But before you become serious about making offers, I strongly recommend understanding your financing.
There are several reasons.
You may qualify for more—or less—than you expect.
A pre-approval helps establish a realistic range before you spend time looking at properties.
Purchase price alone doesn't determine affordability.
Your housing expense can include:
Two homes with identical prices can have meaningfully different monthly housing expenses.
You should know approximately how much money may be required for:
This may be the most important benefit.
Income, credit, assets or documentation can sometimes create issues that aren't obvious to a borrower.
Finding those issues before you're under contract gives us more time to address them.
I think there are actually two different questions:
and
Those numbers don't have to be the same.
A mortgage approval is based largely on lending guidelines.
Your personal budget includes things an underwriting system doesn't necessarily understand:
Just because you can qualify for a particular payment doesn't mean you need to spend that much.
I'll show you what the numbers look like at different purchase prices so you can decide what's comfortable.
Every borrower is different, but a typical review may require information concerning:
This might include:
Self-employed borrowers may require additional documentation.
Depending upon the transaction, this could include:
We'll review your credit profile and monthly obligations used in mortgage qualification.
We'll discuss how much you're considering putting down and whether another amount might produce a better overall financing structure.
You don't necessarily need a final property address to begin this process.
This is one of the most common misconceptions I hear from homebuyers.
A 20% down payment is not required for every mortgage.
Depending upon your qualifications and the mortgage program, lower-down-payment options may be available.
That can include certain conventional programs as well as government-backed financing such as FHA or VA for eligible borrowers.
Putting less than 20% down may involve mortgage insurance or other program requirements.
But that doesn't automatically make it a poor choice.
Sometimes preserving additional cash after closing can be more valuable than making the largest possible down payment.
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Credit can affect:
But mortgage qualification isn't based on credit score alone.
Income, debts, assets, loan-to-value, property type and other factors can also matter.
And don't assume you need “perfect credit” before speaking with me.
If something on your credit profile needs attention, I'd rather identify it early and discuss what may actually help rather than have you guess.
This surprises some borrowers.
If you're preparing to buy a home, don't automatically start paying off every credit card, car loan or other debt simply because you think it will help your mortgage application.
Sometimes paying down a particular account can materially improve qualification.
Other times, those funds may be more useful for:
Before moving significant amounts of money around, let me look at the entire picture.
We can determine where your money is likely to have the greatest benefit.
One factor in mortgage qualification is your debt-to-income ratio, commonly called DTI.
In simple terms, this compares certain monthly debt obligations with qualifying monthly income.
Debts may include items such as:
Different loan programs and underwriting systems may treat certain obligations differently.
That's another reason an actual mortgage review is more useful than relying solely on an online affordability calculator.
I particularly encourage self-employed buyers to start the pre-approval process early.
The income you believe you're earning and the income an underwriter can use for mortgage qualification aren't necessarily the same number.
Depending upon the circumstances, underwriting may evaluate:
Don't wait until you've found the perfect home to discover how your qualifying income will be calculated.
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Once you're pre-approved, you can work with your real estate agent to look for homes within an appropriate price range.
When you're ready to make an offer, the pre-approval can be tailored to the proposed transaction when appropriate.
If your offer is accepted, we'll update the mortgage application using the actual:
The loan then moves through the formal mortgage process.
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Yes.
A pre-approval is based on the information and circumstances available when it is issued.
Changes before closing can affect qualification.
Examples include:
That's why I encourage clients to contact me before making significant financial changes while they're shopping for a home.
After you're pre-approved, this is generally not the time to start financing major purchases.
Before closing, don't assume it's safe to:
Buy or lease a new car
Open a new credit card
Finance furniture or appliances
Co-sign a loan
Increase credit-card balances substantially
A new monthly obligation can affect mortgage qualification.
If you're considering a significant credit transaction while buying a home:
Call me first.
It's much easier to evaluate the effect before the new obligation exists.
Moving money isn't necessarily a problem.
But mortgage underwriting may require documentation showing where funds came from and where they went.
Large or unusual deposits may also require explanation or documentation depending upon the mortgage program.
If you're preparing for a home purchase, keeping your financial activity relatively straightforward can make the documentation process easier.
Again:
If you're unsure, ask before moving substantial funds.
A pre-approval doesn't necessarily mean your mortgage rate is locked.
If rates change, your projected payment can change.
A significant rate increase can potentially affect the loan amount for which you qualify.
When you find a property and have an accepted offer, we'll discuss the available mortgage pricing and rate-lock options.
And remember:
Don't evaluate the mortgage rate without evaluating the cost required to obtain it.
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No.
A pre-approval is not a commitment to lend or a guarantee of final approval.
The final mortgage will still be subject to applicable underwriting requirements.
That can include verification of:
A strong pre-approval can reduce surprises, but it can't eliminate every issue that could arise later.
There isn't one universal expiration period that applies to every mortgage pre-approval.
Information used for qualification can become outdated, including:
If you've been shopping for a while, we can update your information before you make an offer.
I don't want you relying on a pre-approval based on financial information that is several months old.
You certainly have the right to compare mortgage companies.
But I would distinguish between:
getting your qualifications properly reviewed
and
shopping mortgage pricing.
You don't necessarily need five different people performing identical pre-approval reviews simply to compare mortgage options.
What you should compare carefully when selecting financing is:
Interest rate
Discount points
Lender fees
Lender credits
Closing costs
Monthly payment
Loan program
Service and accessibility
I'm happy to explain how our quote compares with another mortgage offer.
In my opinion, a strong pre-approval isn't about producing a letter as quickly as possible.
It's about doing enough work upfront to have confidence in the financing behind the letter.
My approach is to:
Understand the borrower's financial situation
Review the appropriate documentation
Identify the likely mortgage program
Evaluate the proposed payment and cash requirement
Look for potential underwriting issues
Answer questions before the buyer makes an offer
Then, when you do find the right home, we're starting from a much stronger position.
After helping homebuyers since 1999, these are the things I'd want you to remember:
Get properly pre-approved before making an offer.
Know the approximate monthly payment—not just the purchase price.
Understand how much cash you'll need at closing.
Don't assume you need 20% down.
Don't pay off debts or move substantial amounts of money without discussing it first.
Don't open new credit or finance major purchases while you're buying a home.
Tell me if your employment, income, debts or assets change.
Ask questions when something doesn't make sense.
And perhaps most importantly:
Don't buy based solely on the maximum amount someone says you can qualify for.
Choose a housing payment that works with the rest of your financial life.
Capital Funding Mortgage Associates is an independent mortgage broker based in Newtown, Bucks County, Pennsylvania, serving homebuyers throughout Pennsylvania and New Jersey.
Whether you're buying your first home, moving to another home or simply trying to determine what you can comfortably afford, I'm happy to discuss your financing before you begin making offers.
You don't need to have found a house before speaking with me.
In fact, I would prefer that we talk first.
John Madden
Owner, Capital Funding Mortgage Associates
Mortgage Professional Since 1999
NMLS #960139
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John Madden is the owner of Capital Funding Mortgage Associates, an independent mortgage broker based in Newtown, Bucks County, Pennsylvania. John has been helping homebuyers and homeowners with mortgage financing since 1999 and serves clients throughout Pennsylvania and New Jersey.
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