We often come across buyers that get frustrated when asked if they have spoken to a lender and obtained a loan pre-approval. They tell us, “All we want to do is look at houses right now. We know we won’t have a problem getting a loan. We’ll deal with it once we find a house we like.” We understand the frustration, however, we would be doing a disservice if we waited until the buyers found the perfect home prior to starting the pre-approval process. We’ve seen it many times before, buyers losing out on a great opportunity because they did not have a preapproval before they started searching. In some areas and price points, the market can be very competitive. If you found a home you loved, there are probably several other pre-approved buyers who are interested in it as well.
Don’t be unprepared and miss out on the home of your dreams. Talk to your lender (or three or four) about how much house you can afford, what monthly payment you are comfortable with, and so on. They can help you start off your home search on the right foot.
Start with Your Pre-Approval in Hand
Looking for your new home without a solid pre-approval is like shopping without a wallet. The Market is very competitive right now; your offer will be more attractive to a seller with a pre-approval in hand. It also puts you ahead of the process when you finally go into contract and could help you close faster.
Pre-Approved VS Pre-Qualified
When you’re pre-qualified, the lender is simply giving you an estimate about how much you can borrow based on information you’ve provided. When you’re pre-approved, the lender has verified everything you’ve provided and is offering to lend you up to a given amount at current interest rates.
Your actions after receiving lender approval for a mortgage loan can disqualify you for the loan. A mortgage loan is conditionally approved, with the lender reserving the right to re-verify credit, income, assets and employment at anytime. The lender may cancel the loan if there are any adverse changes to your qualification status.
Your debt-to-income ratio is your gross monthly income divided by the amount you spend on debt. Debt items include mortgage payments (including principal, interest, insurance, tax), car payments, credit card payments, student loans, child support payments, etc.
The lender considers debt-to-income ratio when approving you for a mortgage loan. Only 28 percent of your income can be used for your mortgage payment, which includes taxes and insurance; and 36 percent for the mortgage payment plus the rest of your debt. Anything you do to negatively affect your debt-to-income ratio may change an “approval” to a “disqualification.”
Avoid Red Flags
A red flag is any inquiry made regarding your credit worthiness. If you decide to purchase a big ticket item – like a car, boat or furniture – prior to closing, you’re at risk of having a red flag show up on your credit report.
Keep Your Money Where It Is
The balances of your liquid assets are considered when approving you for a mortgage loan. These liquid assets may include checking accounts, savings accounts, certificates of deposit, money market accounts, retirement accounts, stock and mutual funds.
Avoid changes to the balances of these accounts. Do not close accounts. Do not change banks. A large withdrawal or deposit to any of these accounts will trigger a red flag for your mortgage lender. If a red flag is triggered, you may be asked to produce a paper trail tracking large withdrawals and/or deposits.
For most employees a change of jobs to one of equal or higher pay will not trigger a red flag. However, sales people should not change jobs prior to closing on their mortgage loan.
If your income is strictly salary than you should not have a problem changing to another job of equal or greater income. If, however, your income includes salary and bonuses, commissions and/or overtime, you should not change jobs prior to closing.
If your income is based solely on a 40-hour work week without overtime, than changing to a job with equal or greater hourly pay should not be a problem. However, if your income is dependent upon overtime pay, do not change jobs prior to closing.
If your income is from commission or a substantial portion of your income is from commission, then you should not change jobs prior to closing. Typically, mortgage lenders average your commissions over the last two year period to determine income. Changing employers eliminates the two-year commission history and places uncertainty on your income status.
Talk to Your Loan Originator
Do not make any changes to your financial and employment status without first talking to your loan originator.