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The Pitfalls of Pre-Approvals
Posted August 21st, 2014 under pitfalls, smart buying.
Most agents today want their buyers to get pre-approved for a mortgage, so the agent can properly gauge the buyer's maximum level of affordability.
Pre-approval is not the simple process many people believe it to be. Here are some pitfalls to watch out for when getting pre-approved.
Get A Credit Check
Some mortgage consultants perform a credit check when qualifying you, others don't. If yours doesn't, you need to check your credit report yourself.
Any problems on your report could affect the amount you qualify for. Even if you have excellent payment habits, you may be surprised to discover that clerical errors can result in bad marks on your credit report. The sooner you know about problems with your credit score, the more time you have to fix them before you apply for your mortgage loan.
Know Your Real Maximum
Some consultants will ask you how much down payment you have available. If your down payment is less than 5% of your maximum loan amount, the consultant may tell you a smaller loan amount that matches your down payment.
In one sense, this is intended as a convenience because it tells you the maximum you can afford under current conditions.
However, many buyers are able to raise a larger down payment than what they currently have. It's better to know your actual maximum loan amount (based solely on your income and debts). From there, you can use the 5% figure to calculate your maximum loan for various down payments.
Cut those Credit Cards!
Many people don't know that the bank calculates your maximum loan amount based on the assumption that all of your credit cards will be maxed out—not based on your current balance!
Before your pre-approval, cancel all unnecessary cards. If any remaining cards have an unnecessarily high limit, ask to have the limit reduced. (Keep your limits reasonable is a good security measure anyway.)
The benchmark for your total allowable debt is usually 42% of your gross income before taxes. (Some lenders vary from this figure a little.) The more credit cards you eliminate, the more of that 42% is available for your mortgage.
Appraisals Trump Purchase Price
Never forget that your purchase price does not determine the value of the home, the bank's appraisal does.
If the appraised value is less than the purchase price, the bank may adjust the amount of mortgage loan they give you.
Remember, the home is the collateral for the loan. No matter what your income and debt situation might be, the bank will never give you a mortgage loan worth more than the home itself.
The risk here is because your loan amount can be adjusted after you are already legally committed to buying the house. This can leave you scrambling to come up with thousands or even tens of thousands of dollars!
To avoid this situation, the best move is to ask your agent to give you an accurate appraisal of the home's market value ahead of time.
This will let you estimate a realistic mortgage loan amount, so you can make an informed purchasing decision and won't be caught later.
Want to know more about mortgage loans and pre-approvals? Just ask me, I'll be happy to help.
