Editor’s note: This is the second article in a two-part Perspectives on Personal Finance series on mortgage rates. Read the first.
If you’re getting ready to take the leap into homeownership, there’s a preliminary step you may want to take before falling for the ranch that’s out of reach only to have your heart broken. You’ll want to do your financial homework first.
"Don't ever shop for a home without being pre-approved for your mortgage," says Gina Pogol, loan adviser at LendingTree. Although there are online mortgage calculators, some don't take into account real estate property taxes, home insurance premiums, and private mortgage insurance (PMI), and you might wind up with inaccurate information about how much you can afford to buy.
Talk with a Lender
Be aware of the differences between pre-qualification and pre-approval.
Pre-qualifying simply means you've answered a few questions about your income and debts. That process gives you a letter saying you "should" qualify for a purchase priced in a particular range.
Pre-approval is the real deal. It means you apply for loan, go through a credit check, and document your income. It’s also sometimes required by a seller before they’ll play ball. "Most real estate agents and home sellers won't take you and your offer seriously unless you've established your ability to actually close the deal. Pre-approval provides boundaries, so you don't waste your and everyone else's time looking at homes you can't realistically afford," says Pogol.
Papers in Order
Underwriters will ask for a lot of information, including pay stubs and detailed bank statements. It’s your job to find the necessary paperwork and deliver it to your lender to advance your application. "Many times applications sit on mortgage processors' desks because the borrowers have not supplied everything necessary to get the file into underwriting. In a busy office, every time your application needs something else, it may be moved to the bottom of a pile and not resurface for days," Pogol says.
Share Your Gifts
If you are lucky enough to have a generous parent, in-law, or aunt who is willing to gift you funds toward your down payment, be sure to talk to your lender about it ahead of time. Gifts are generally allowable, but proper documentation and a letter explaining the big infusion of cash into your savings account will be needed.
Shut Off the Credit Tap
Even after you've been pre-approved and found the house of your dreams, don't rush out and buy new furniture on credit before your home has actually closed. It’s not the time to go new car shopping, either. "If it looks like you're increasing your available credit, your application could be sent back for another round of underwriting, or worse, declined," Pogol warns.
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