Is Pre-Qualifying a Smart Move?

The Pros and Cons of Pre-qualifying for your Mortgage.

Buying a home is likely the biggest purchase you’ll make over a lifetime. You want to get the best deal possible, but at the same time you’re sure to fall in love with your dream home – regardless of the cost. So how do you protect yourself from making a huge financial mistake? Start by pre-qualifying for a mortgage.

Mortgage pre-qualification will give you an idea of home much of a home you can afford based on your annual income. However mortgage pre-qualification amounts often far surpass the amount you can actually afford on a monthly basis – especially when you take closing costs, and all the extras outside of the pure purchase price of your home into account.

Before you approach a mortgage broker or the back for pre-qualification, do some simple calculations at home. You can start assessing the price of the home you can actually afford by:

Examining your financial situation – Take into consideration monthly income, what you currently spend on rent, any personal assets that you have (investments, savings accounts) and that you might be willing to cash in towards the purchase of a home, how much of a down payment you can make on a home…and etc.

Use a mortgage calculator – You can find a mortgage calculator easily online. Bankrate.com offers visitors access to a free mortgage calculator that measures your financial state based on all of the guidelines that will enumerate the factors that the bank or broker will evaluate in order to qualify you for a mortgage – including mortgage amount (base this number on the maximum amount you can afford to pay for a home), mortgage term (or length), interest rate (Bankrate.com also features the current average interest rates on their website), and extra payments. This calculation will give you an average monthly mortgage payment. Is this something you can comfortably afford every month? If not, lower your home purchase price and do the calculation again until you find a monthly payment you can afford. This will be your maximum home purchase price.

Look in the newspaper and on real estate sites for homes you like – This will be just preliminary research to find out if the home you want – suits your maximum home purchasing price. If it doesn’t you might want to think about lowering your expectations in a home. After all there are things you simply can’t live without – such as 3 bedrooms if you have 2 small children; however if your expectations include an in-ground swimming pool, central air, central vacuum and 4 bathrooms – you may want to sit down and re-evaluate what is really a priority based on the maximum price that you can afford.

Get your credit report – Every U.S. citizen is entitled to a free credit report based on the Fair Credit Reporting Act (FCRA). Your free credit report is supplied by one of the world’s leading credit bureaus - Equifax, Experian or TransUnion. The Federal Trade Commission (FTC) website will provide you with all the information you need to get a copy of your free credit report. It’s important to check your credit report for inaccuracies in the months prior to pre-qualifying for a mortgage, just in case errors prevent you form getting a mortgage. During the pre-qualification process, your lender will request a copy of your credit report to determine your credit worthiness. Your credit report will give them all of your credit activities – for example if you pay your bills on time, whether filed for bankruptcy or defaulted on a loan or credit card, and etc. Your pre-qualification will be based on this credit report – so obviously it’s important for you to check it first, to make sure it’s accurate. To get a copy of your free annual credit report, complete an Annual Credit Report Request Form, you can access a copy by calling 1-877-322-8228, or online at AnnualCreditReport.com.

After you get a feel for the home you want – and have a maximum purchase price to match your expectations, you should start looking for a mortgage broker or a bank. If you’re not sure which to go with, read our article Mortgage Brokers vs. Banks to find out the advantages and disadvantages to each one. To be honest, you will want to go with a broker or banker that you feel the most comfortable with, and one that will give you the attention you deserve and answer any questions you might have. Most importantly, you will want to go with a broker vs. banker based on which one gives you the best mortgage options. For starters, just go where you’re most comfortable – for instance if you have an existing relationship with a loan officer at a bank – go there to find out if you can indeed even pre-qualify for a mortgage. You will know fairly early if the broker or banker is helping you adequately advise you on the best mortgage for you. For the pre-qualification of your mortgage the loan officer will be evaluating you based on similar calculations of the online mortgage calculator – see you’re already ahead of the game!

Why is pre-qualifying for your mortgage so important?

By pre-qualifying for a mortgage you’re essentially providing peace of mind the lender in the form of a written document, which clearly indicates the maximum mortgage you can afford to qualify for. A mortgage pre-qualification is a free process that’s helpful for both you (to figure out you’re your maximum housing price) and for your lender. Your pre-qualification is based on:

• Your credit report and credit score.
• Any personal assets you might have (other property, investments, automobiles, savings accounts).
• Your income
• Your current and past employment history

Pre-qualification is so important for the following reasons:

• Pre-qualifying for a mortgage can literally save you money when you negotiate with the current owner of the home you want, because you know what you can afford ahead of time – and won’t find yourself in a financial mess later on with a home you can’t afford.
• Pre-qualifying speeds up the home buying process – because those who pre-qualify are given preference over others in multiple offer situations.
• You will also be given preference as a buyer if you pre-qualify because the homeowner knows you are good for the money – and he or she isn’t wasting time with you.
• You will likely need to pre-qualify for a mortgage before a real estate agent will even work with you.
• Pre-qualification will save you time and money because you will know what housing costs are within your price range.