Pre-approvals are a funny animal. Home buyers sometimes rely on them too much and lenders sometimes offer them only reluctantly (due to their cost and tendency not to close).
This week’s Globe column covers 10 ins and outs of mortgage pre-approvals. Below are additional considerations that didn’t make that story…
You might not afford your pre-approved home: Lenders and brokers can tell you if your debt load is within customary maximums. They can tell you how much you’ll likely qualify for. They can tell you that your credit and employment meet guidelines. But they can’t always tell if your mortgage payments are affordable (based on your “true” budget). Only you can assess that. So be honest with yourself and overly conservative. I’ve seen countless folks drastically underestimate their spending as homeowners, only to dig themselves into a gaping debt hole with decorating expenses, kitchen renovations, new furniture, new electronics, new appliances, new yard tools, landscaping expenses, basement refinishing, swimming pools, and so on.
Keep retirement in mind: Just because you’re pre-approved for a $200,000, $300,000 or $400,000 mortgage doesn’t mean you can afford the payments and save for retirement. Before embarking on a pre-approval, understand how much you should be saving to fund life after 65. Use a retirement calculator (take your pick, here’s one example) and understand projection limitations. If your pre-approved mortgage won’t let you meet your calculated monthly savings target, you need a smaller mortgage.
Find a mortgage originator who has time for pre-approvals: I know brokers and bankers who actually loathe pre-approvals because they’re so time consuming and because of the high cancellation ratio. If you’re home buying (especially for the first time) and you’re unsure about the process, use a mortgage advisor who doesn’t make you feel rushed. Find someone willing to make a one-hour appointment to consult with you. Look for someone who doesn’t just quote rates and run a 5-minute pre-qualification analysis, but someone who asks tough (perhaps uncomfortable) questions about your “real” budget.
You need decent credit: Most subprime lenders don’t offer pre-approvals. If your credit is in the toilet (or undeveloped), find an experienced advisor who can put you on an 18- to 24-month plan to establish credit and prepare you to buy (if buying makes sense for you).