When you're in the early stages of considering a new home, it’s easy to put off applying for a mortgage. You might even think you’re still several months away from needing to trouble yourself with filling out all of the paperwork.
You'll Learn What Lenders Think of You
The amount of your mortgage and the rate on your loan are determined by your income and credit report. Some people overestimate their credit score or how much the bank will be willing to lend them. With a pre-approval, you’ll see your credit score and what kind of rates you can get at your current credit tier. You’ll also get an idea of the maximum amount the bank will loan you.
Many people then use this information to put themselves in a better position to afford the home of their dreams. Focusing on paying bills on time will improve your credit score and get you better rates. Decreasing your debt load will allow the bank to offer you a higher mortgage amount. Little things can make a big difference.
You'll Avoid Surprises
By the time most people apply for a mortgage, they’ve already made quite a few decisions about their next home. In fact, many have already made an offer on a resale home or started to make some design choices on a brand-new build. Making these types of decisions before getting a pre-approval can leave you feeling surprised or disappointed if the bank doesn't loan you as much money as you expected.
A common problem is estimating loan amounts based on annual earnings rather than monthly earnings. If you're including annual bonuses in your calculations, you may be overestimating how much you can afford. Banks typically only use the monthly earnings to make their decision. With a pre-approval, you’ll learn these details ahead of time and can adjust your plan accordingly.
You'll See the Whole Picture
Mortgage pre-approvals usually tell you how much the bank thinks you can afford on a monthly basis. Since property taxes and homeowners’ insurance are a part of the monthly payment, the full amount of the loan the bank could give you varies. If you choose an area with high property taxes or have features in your home that could increase insurance costs – such as a swimming pool – then the bank may lend you less.
Fortunately, after your pre-approval, you’ll know the rate of your loan, and you’ll be able to play around with a down payment calculator to see how different choices and down payment amounts will affect your monthly payment.
You Can Set a Realistic Budget
A pre-approval also gives you a more realistic look at how much money you can really afford - and it's easy for home buyers to overestimate. This is because the bank won’t count overtime pay or they forget to include property taxes and insurance into their calculations.
With a pre-approval, you’ll have accurate numbers to work with. You also get a solid look at the monthly payments for homes at different price points. Sometimes, the monthly payment the bank thinks you can afford is higher than the amount you feel you can comfortably afford. All of these details help you get realistic about your home budget.
You Can Lock in Your Rate
When you apply for a mortgage pre-approval, the lender will “lock in” the current rates. This means you're guaranteed these rates for a period of time before you commit to the lender. If rates go up, you’ll be in a better position because you locked in the lower rate. Fortunately, it’s only the bank that’s locked into the rate. If rates go down, you’ll be able to get the lower rates when you apply.
You'll Prevent Hold-Ups
Most mortgage applications go through without a hitch. However, certain situations are a bit more complex. For instance, people who freelance or own their own business may require additional proof of income. In most cases, these situations are easily resolved, but it can take time to gather the necessary paperwork. With a mortgage pre-approval, the bank already has everything they need. When actually applying for the mortgage, you’ll have to submit more recent pay stubs, but you are unlikely to have major problems.
If you’re thinking about buying or building your new dream home, it’s smart to consult with a lender to get mortgage pre-approval. Since loans for new construction work a bit differently than loans for resale homes, you should consider applying through the builder’s preferred lender. Their familiarity with the process makes everything easier.