How do your Left & Right Brains help you with the mortgage pre-qualification pre-approval?
LEFT BRAIN:
Step #1 What can you afford?
Pre-qualification will provide a general idea of what you can afford to pay for your new home. You provide your financial information and complete a budget for life in your new home, and the assessment suggests what you can afford for monthly payments.
Be honest and take the time to be accurate. The lender has no idea what’s factual or inflated. You and your numbers impact this assessment!
This assessment can be done for free over the phone.
Some apps can help you with this as well.
NOTE: This does not include a credit history report, so it does not hold as much weight as the pre-approval.
Gain confidence: complete a budget & financial plan for this transition.
Step #2 What will they lend you?
Pre-approval provides a written conditional commitment for an exact loan amount for your new home. It usually specifies a term, interest rate, and amount. It is valid for a brief period, such as 90 to 120 days, if various conditions are met.
You provide proof of your financial data with paystubs and completed income taxes, and your credit history is obtained from various sources.
The lender scrutinizes your financial situation and history to determine how much mortgage you can reasonably afford.
Gain confidence: Book an appointment with at least one lender or mortgage broker. You can shop around.
RIGHT BRAIN: WANT vs CAN
Tip 1:
Take time to compare your values, needs, and how much house you WANT to afford because this one decision will impact your entire life. Do you want to be house-poor, i.e., have enough money for mortgage payments and nothing left for emergencies, fun, vacations, children’s education, or retirement savings? What you honestly want to afford and what a bank might say you can afford might be significantly different. Remember your values from the first post in this series! Lenders may be focused on the long-term income they will receive from your interest payments, so they may suggest a bigger mortgage than feels comfortable to you. They may also suggest smaller monthly payments, so you pay off this debt very slowly.
Tip 2:
Be patient before you start chasing another dream. Once you have your pre-approval, don’t endanger your status with big changes. Wait until your mortgage contract and sale are completed before you change jobs (unless you are moving for work), buy a new car or trade up, transfer large sums of money between accounts, or open new credit cards. Ensure your bills are paid, and you do not add significant debt to your debt-to-income ratio.
Lenders use your Debt-To-Income (DTI) ratio to determine your borrowing risk. The DTI is the percentage of your monthly gross income (your pay before taxes and other deductions are taken out) that goes to paying your monthly debt payments. For example, if your DTI ratio is 18%, this means that 18% of your monthly gross income goes to debt payments each month. The lower the debt-to-income ratio, the better your chances of being approved. You want to be sure you don’t have too many debt payments relative to your income. Typically, 43% is the highest DTI ratio you can have and still qualify for a mortgage. Lenders prefer a debt-to-income ratio lower than 36%, with no more than 28% to 35% of that debt going toward servicing a mortgage payment. If your DTI is too high, you can change it!
Gain confidence: Implement strategies to reduce debt for this transition.
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Enjoy,
Karen Fenske, Registered Retirement Consultant, MBTI Coach & Founder
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