In this post, we're going to address several topics.
1) What does it mean to be pre-approved?
2) Should I look at houses before being pre-approved?
3) What do I need to do with my pre-approval before writing an offer?
What does it mean to be pre-approved for a mortgage when buying a house?
Regrettably, pre-approvals take many forms. Ideally, a pre-approval will examine the following.
1) Income! Not a look at what you THINK you make, but what you make. Hello, Tax return.
2) Credit. Credit is more than just a score people! But scores matter
3) Debt-to-income. The level of debt-to-income that you have is probably the most important indicator of what you can afford. But most people stop looking after they get the score, which is related to - but not a copy of - the debt to income (or DTI for short).
4) Ways to improve your loan status - by increase credit scores, fixing DTI, and solving other issues.
5) Understand your leverage options. 96.5? 95%? 90%? There are big differences in loan programs, and you should be aware of the different costs and problems you will have as the leverage goes up or down.
5) Cash-on-hand. It takes cash to buy a house! If you haven't had your cash position discussed, you may not be able to do what you think you can do.
6) Other issues: H1B visas can be harder to finance in certain situations. Condos or Condexes could be a problem.
When you've reviewed all these items, you truly have a pre-approval. More importantly, you are aware of where you might be "tight", and what you might do to improve it.
If you have a pre-approval already, did you examine all these items? No? I thought not. But you will need to if you then proceed to get a mortgage. And in this environment, there are more than a few snakes in the grass that could turn your home buying dream into a nightmare, if you're not prepared. We'll talk more about this in the last section.
Should I look at houses before being pre-approved?
Sure! No law against that yet! Let's get out there and look. One problem though: What if you see something you like? Then what do we do? Hmmm. Well we have to go get a pre-approval, but that takes time, and the less time it takes the less thorough it is, and the more risk you are taking on! So you can go looking, but you should really get a pre-approval - a COMPLETE one - as soon as you think you might move. Here's some good news. You don't have to committ to a lender when you get a pre-approval, so you can shop around later. Rates and programs change all the time, so there's no point in worrying about that just yet. Think of the pre-approval process as a lender interview. You don't have to hire them, if you find a better deal elsewhere, but its good to have one relationship out there.
What do I need to do with my pre-approval before writing an offer
The question here is truly, "How do I get ready to make an offer on the credit side?" Here are the things you need to consider.
1) Credit improvements. Credit scores qualify you for different "levels" of programs, and those levels have different rates. So if your composite score is 710, you might be able to get a loan at 4.25%. But if it's 720, you might be able to get a loan at 4.0%. Folks, 4.0% is a lot better - and you only need 10 little points. Many lenders are very good at this type of credit clean up, BUT it can take time - up to a month or more - and that is not time we have when we are writing offers and buying houses! (Typically you only have a month to get a loan, and you'll need every day of it). Also, if you are doing it "in process" you don't know that you will be successful, and that can create serious problems. The best thing to do is get that score fixed before you find the house!
2) Explore your leverage
I've had many buyers set on getting FHA loans at 96.5% Loan-to-Value (or LTV). But guess what? Loans at 95% are often easier to get, and have better rates and costs. All you need is 1.5% more. On a $300,000 house, 1.5% is $4500. It's a lot, but it's often doable, especially if the better program saves you $4500 every year! Many times you can avoid PMI at 90% with certain lending programs. That can save you serious dough! If you're close to getting a better mortgage with a slightly bigger down payment, it's good to know how much you'll need - and when you'll need it. Banks don't like "unexplained" deposits to show up at the last minute, so calling your buddy at the last minute isn't going to work! Figure out how to get there - ahead of time - and the process will be much less stressful.
3) Watch your income! Self-employed? These are harder loans to do - so make sure your lender knows that's the case.
Once you've done these things, you're ready to write that offer. And the mortgage process won't freak you out as much. And that's a good thing.
**Notes: The Author is not a mortgage lender, but he plays one on TV.