Get Pre-Approved: The Hows and the Whys

Getting pre-approved is especially important for first time home buyers but it is really something that anyone who is embarking on a house hunt should do. (If you haven’t worked with a loan officer/mortgage professional before your buyer’s agent can give you a few referrals on who to contact) Pre-approval basically consists of contacting a mortgage professional and giving them both some financial and personal information. You will also discuss what kind of monthly payment you would like and how much you are thinking of putting down on your future home. They will then get you “pre-approved” with a lender for the maximum amount someone will be eligible for from that particular lender. Getting pre-approved is important so that you know what kind of price range you have to work with, and you will not waste time looking at homes you can not afford. When you finally find a house that you are ready to put an offer a pre-approval letter can show the seller that you are serious and in most cases can get the financing required to purchase the house they are selling.

One of the things that any lending institution will consider when getting a borrower pre-approved is there D.T.I. (Debt to Income Ratio). This ratio shows the lender how much of your income is available for a mortgage payment. Many conventional loans use the ratio 28/36. A typical FHA loan uses the ratio 29/41.

The 28 is the percentage that a lending institution will allow you to allocate towards housing from your gross income. The total includes payments on the loan principal and interest, private mortgage insurance, hazard insurance, property taxes, and homeowner’s association dues, know as PITI (Principal, Interest, Taxes, Insurance).

The 36 is the percentage that a lending institution allows for both your housing expenses and your requiring debt. Examples of requiring debt are: credit cards, car loans, alimony, child support, and any other longer-term financial responsibility. 

To figure this out your monthly income: Take your gross yearly income and divide by 12
Exp: 35,000/12=2916.66

Take your monthly income and multiply by .28 
Exp: 2916.66 X .28 = 816.66 allowed for housing expenses 

Take your monthly income and multiply by .36
Exp. 2916.66 X .36 = 1049.99 allowed for housing expenses plus requiring debt

The difference between Pre-Qualified and Pre-Approved:

Pre-Qualified is where you give a mortgage professional a hypothetical set of credit scores, income, debt ext. and they tell you what an average borrower you have described would qualify for. Pre-approval is when the loan officer actually pulls your credit and reviews your income and assets and says what you personally should be approved for. The loan officer then puts this into a letter form for you to be able to submit to a lender. There should not be a charge for this service.