A pre-approved mortgage is a tentative promise from a lender that it will loan you a certain amount of money for the purchase of real estate, for a certain term and at a certain interest rate. In a pre-approved mortgage process, the lender will base its decision upon your income and credit score.
As a general rule, your housing costs, including your mortgage payment, taxes and heating expenses shouldn’t be more than 32% of your gross household monthly income. This will give you an idea for how much of a mortgage you may be approved.
A pre-approved mortgage is a tentative determination by the lender to loan you a certain amount of money. It is not a final decision and is usually only valid for 90 to 120 days. The final decision may depend upon whether the appraisal of the real estate is high enough to protect the lender in the case of default, whether the title is clear, whether the property meets inspection standards, plus a number of other factors.
Example - How Mortgage Preapprovals Work
Buyer A desires a new house. Before looking at the housing market, Buyer A goes to a mortgage broker completes an application and supplies income and credit information. After reviewing these documents, the broker contacts lenders to determine if Buyer A is eligible. The broker receives offers from several lenders offering to tentatively lend Buyer A $200,000 at 5% interest. They provide a tentative statement that Buyer A is “pre-approved” for up to $200,000, based on certain conditions.
Advantages of a Pre-Approved Mortgage
Though it sounds basic, knowing how much you are able to spend before purchasing a home is always a good idea. If you know you are pre-approved for $200,000 and you have $35,000 for a down payment and closing costs, it makes little sense to be shopping for $400,000 houses. With a pre-approved mortgage, you know exactly where you stand before shopping for a home. In fact, many realtors will want to see a pre-approval before they will begin to help you look for a home.
At First Foundation, we strongly urge a prospective home buyer to consider getting a mortgage pre-approval. We can provide you with the tools necessary to obtain a pre-approved mortgage, including an online mortgage application, and will walk you through every step of the process. Mortgages are our business and we are in business to serve you.
If you are interested in learning more about pre-approved mortgage, please feel free to contact us today!