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Mortgages - The Benefits of Pre-approval

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As soon as you decide to buy a home, it is important to get preapproved through a loan officer or a mortgage specialist. This is an important step in the buying process because it provides home buyers with more options and security. Going through the process also helps you understand how mortgages work, and which programs and interest rates you qualify for.

First, you should understand that there is a difference between being prequalified and preapproved. Prequalification is usually unofficial, and includes determining your debt-to-income ratio. This allows for a general understanding of the price range you can consider when looking for your future home. Debt to income ratios take into consideration all of the recurring debts you pay each month (i.e. car loans, credit cards, and other mortgage payments), and contrast them with your total monthly income. These recurring debts do not include utilities, food or other monthly expenditures. As a general industry rule, mortgage payments shouldn't tie up more than 28 percent of your monthly income. In addition, the mortgage payment plus your additional debt payments can only take about 36 percent of your monthly income. On the other hand, prequalification does not involve an analysis of your credit report, and it also doesn't allow you to know what interest rates you could obtain, which will affect your monthly payment.

Being preapproved brings with it several benefits. First, the lender takes a full look at you and your situation, including an analysis of your debt-to-income ratio and credit history. By doing this analysis, the lender can give you an accurate assessment of the maximum amount you can borrow, interest rates that will be available to you and what mortgages and programs you qualify for.

Though it seems tedious to be preapproved you will need to do it sooner or later unless you can pay for your home in cash. One obvious benefit to having this approval is you will know your price limit for homes, preventing you from wasting time looking at homes you can't afford. Also, sellers and their representing agents are becoming increasingly selective about the buyers they will accept offers from. Many sellers and their agents will only accept offers from preapproved buyers because if they accept buyers who aren't preapproved, they run the risk of wasting time with that buyer if they actually can't qualify for the price range of the home. Many sellers feel doing this is a safer bet if they are trying to sell their home quickly.

As a final note, it is important to understand that preapproval does not guarantee you can buy a home. Before you can close the deal, an underwriter has to approve the actual home you wish to purchase. This approval will generally consist of an appraisal, title search and sometimes a satisfactory home inspection. When you receive a 'loan commitment' from your lender you can confidently move ahead and finalize the deal.

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