Before you start shopping for a home, the No. 1 piece of
advice for homebuyers in today's market is to get a
preapproval. While a mortgage preapproval doesn't guarantee a
loan, or that you'll find a home you want to buy, it does provide
- How much mortgage you can borrow
- Your estimated monthly payment
- Documented proof to a seller that you can qualify for
"You wouldn't go to the grocery store without your wallet and
you shouldn't shop for a home without a preapproval for a
mortgage," says Dominic Turano, branch manager for First Home
Mortgage in Washington, D.C.
Turano says most Realtors won't discuss properties with you
until you have a mortgage preapproval.
What's the difference between preapproval and
Getting prequalified is the first step toward a preapproval. A
can be done by anyone -- your Realtor or mortgage associate can
run one on you, or you can even run one yourself. This is done to
produce a working price range for homes you can likely afford. A
prequalification will produce a ballpark estimate of how much
mortgage your income will support.
"When you prequalify someone for a loan," says Aiman Abozeid,
branch manager for Inlanta Mortgage in Madison, Wisc., your loan
originator will check three things:
- Your credit
- Your income
- Your down payment
"If your credit is acceptable, a lender can give you a
prequalification and an idea of the amount you can borrow," he
takes this a step further. Usually, you will actually submit a
mortgage application with your lender and then provide some basic
income, asset, and debt documentation. You'll also generally pay
a fee to the lender that will cover pulling your credit report
and the cost of an appraisal if you find a house to buy.
The lender or broker will then run your financial information
through an automated underwriting system that checks your credit
and debt-to-income ratio and generates a preapproval letter if
you qualify. This is also known as issuing you a "conditional
commitment." However, a key missing element in the transaction is
the return of a satisfactory appraisal on a house that you have
signed a contract to buy -- and updates to any documents you're
Discuss loan options with your lender
Turano says a good lender will ask a lot of questions during
preapproval about your budget and your cash availability in order
to offer some guidance on loan programs.
"Even within a 30-year fixed-rate loan program there are lots
of options for FHA, VA, and conventional loans," says Turano.
Turano provides borrowers with a maximum loan amount including
estimated closing costs and monthly payments based on the
projected down payment.
"I educate borrowers on the merits of various loan programs
and run through different scenarios based on what they feel they
can afford for their cash investment and their monthly payments,"
says Peter Boyle, a senior loan originator at Summit Mortgage in
Prepare for future financial challenges
While the lender can provide you with a maximum mortgage amount
that your income will support, you should also consider how
much mortgage debt you are comfortable handling. It's a good
idea to keep in mind that there will be other and unexpected
costs of owning a home, and stretching to borrow every last
dollar for your mortgage could leave you unprepared for future
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What Is Mortgage Preapproval?
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