Pre-Qualification vs Pre-Approval

Without good preparation, many buyers get lulled into the mistaken notion that if a lender pre-qualifies them for a mortgage this means that they have been pre-approved for a home loan. Unfortunately, there's a world of difference between these two terms. If you've ever been confused by the two, I will bring you up to speed on how these terms differ - and why a misunderstanding can mean disaster for borrowers.

 

Pre-Qualify

Getting pre-qualified is the initial step in the mortgage process, and it's generally fairly simple. You supply me with your overall financial picture, including your debt, income and assets. After evaluating this information, I can give you an idea of the mortgage amount for which you qualify. Pre-qualification can be done over the phone or on the internet, and there is no cost involved. Loan pre-qualification does not include an analysis of your credit report or an in-depth look at your ability to purchase a home.

 

The initial pre-qualification step allows you to discuss any goals or needs you may have regarding your mortgage with me. At this point, I can explain your various mortgage options and recommend the type that might be best suited to your situation.

 

Because it's a quick procedure, and based only on the information you provide to me, your pre-qualified amount is not a sure thing; it's just the amount for which you might expect to be approved. For this reason, a pre-qualified buyer doesn't carry the same weight as a pre-approved buyer who has been more thoroughly investigated.

 

Pre-Approved

Getting pre-approved is the next step, and it tends to be much more involved. You'll complete an official mortgage application (click here to do so), and supply me with the necessary documentation to perform an extensive check on your financial background and current credit rating. (Typically at this stage, you will not have found a house yet, so any reference to "property" on the application can be left blank). From this, I can tell you the specific mortgage amount for which you are approved. You'll also have a better idea of the interest rate you will be charged on the loan and, in some cases, you might be able to lock-in a specific rate.

 

With pre-approval, I will give you a pre-approval letter in writing for an exact loan amount, allowing you to look for a home at or below that price level. Obviously, this puts you at an advantage when dealing with a potential seller, as he or she will know you're one step closer to obtaining an actual mortgage.

 

The other advantage of completing both of these steps - pre-qualification and pre-approval - before you start to look for a home is that you'll know in advance how much you can afford. This way, you don't waste time with guessing or looking at properties that are beyond your means. Getting pre-approved for a mortgage also enables you to move quickly when you find the perfect place. When you make an offer, it won't be contingent on obtaining financing, which can save you valuable time. In a competitive market, this lets the seller know that your offer is serious - and could prevent you from losing out to another potential buyer who already has financing arranged.



 

Down Payment Options

The down payment is often the biggest obstacle for first-time homebuyers. It isn’t easy to come up with a large chunk of cash, even if you’re good about saving. Luckily, you have several options for your down payment. I’ll describe the main options so you can determine which makes the most sense for your situation.

Conventional- 3%

Conventional loans carry no guarantees for the lender if you fail to repay the loan. So for this reason, if you make less than a 20% down payment on the property, you’ll have to pay for private mortgage insurance (PMI) when you get a conventional loan. (If you default on the loan, the mortgage insurance company makes sure the lender is paid in full.)

 

Conventional mortgage loans must adhere to guidelines set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) and are available to everyone, but they are more difficult to qualify for than RD and FHA loans. (Since there is no government insurance, conventional loans pose a higher risk for lenders so credit and income requirements are stricter.

Generally, you can get a conventional loan if you:

  • have good credit

  • have a steady income

  • can afford the down payment (may be gifted from relative)

RD- Zero Down

With this program you will receive 100% financing if the property is in an eligible area. (Click here to search).

 

Here's a few guidelines in order use this loan option...

  • The subject property must be a primary residence

  • The buyer must be at least two years seasoned from a bankruptcy discharge

  • The buyer must have decent credit

  • The buyer must meet a qualifying ratio of 29 percent for housing costs; and 41 percent for total debt

  • The buyer may not own another home within commuting distance of the subject property

  • The buyer's household income may not exceed 115% of the area's median income. (Click to search your area)

  • At least one applicant whose income or assets are used for qualification must have at least 3 historical trade line payment references that have existed for at least 12 months to establish a credit reputation and validate the credit score. (Or will be downgraded to manual underwrite)- Restrictions apply.

*Please contact me for questions regarding whether or not you will qualify for this loan program. Not all qualify.

 

The VA guarantees purchase mortgages with no required down payment for qualified veterans. As a private lender I originate VA loans, which the VA guarantees. There is no mortgage insurance(PMI or MI). The borrower pays a funding fee, which can be rolled into the loan amount.

 

The VA funding fee varies, depending on whether the veteran served in the regular military or in the Reserves or National Guard, and whether it's the veteran's first VA loan or a subsequent one. The funding fee can be as low as 2.15 percent or as high as 3.3 percent.


Here's a few guidelines in order use this loan option...

VA- Zero Down

 

  • Veteran, or eligible widow(er), must have sufficient entitlement

  • The buyer must be at least two years seasoned from a bankruptcy discharge/dismissal date

  • The buyer must have decent credit

  • The VA does not limit the number of VA guaranteed loans a veteran may have, however the VA does limit the amount of guarantee a veteran is entitled to. The veteran must have sufficient guarantee or combination of guarantee and equity in the subject property to equal a minimum of 25% of the value of the property.

FHA- 3.5%

The Federal Housing Administration (FHA) was created to help middle- to lower-income buyers secure home loans. The FHA doesn’t actually lend the money; instead, it insures the loan. The FHA requires down payments as low as 3.5%. There are guidelines and the buyer’s credit is important to meeting these requirements. There is even a similar option as RD for 100% financing when a home is not in an eligible area. (Income limits apply)

 

FHA requires up-front MIP (stands for Mortgage Insurance Premium) as well as monthly MIP. MIP is for the life of the loan, if you do not put at least 5% down. The current up-front MIP factor is 1.75% of the loan amount, and the monthly MIP factor is .85%.

 

 

 

Your Mortgage Payment

Your monthly mortgage payment typically is made up of four components: principal, interest, taxes and insurance together known as PITI. The principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. The interest is the fee charged for borrowing money.

Taxes refer to property taxes your community levies which are generally based on a percentage of the value of your home. We usually collect 1/12th of the yearly property tax bill each month. We also usually collect about 3 months of taxes in advance at closing (used as a cushion), and it's placed in an escrow account that will allow the current servicer to pay property taxes when they come due around December of each year.

 

You cannot close on your home loan if you don’t have hazard insurance to cover your home and your personal property against losses from fire, theft, bad weather, and other causes. The insurance amount is collected and paid much like the taxes. Each month 1/12th of the insurance bill is collected and stored in an escrow account until the bill is due.  (Unless you decide to waive escrow- {20% equity required}) Even if you pay cash for your home, it is a good idea to buy hazard insurance in the event your home is damaged or destroyed. A 3 month cushion is also collected for the start-up of your escrow account at closing.

 

Principal and interest comprise the bulk of your monthly payments. A process called amortization reduces your debt over a fixed period of time. With amortization your initial monthly payments are largely interest and as the loan matures a greater portion of your payment is allocated toward the principal.