Buying A Home in Farmington Hills MI? Getting A Pre-approval is Key: You may have been told that it’s important to get pre-approved at the beginning of the homebuying process, but what does that really mean? And why is it so important? In today’s market, with rising home prices and high buyer demand, it’s crucial to have a clear understanding of your budget and stand out as a serious homebuyer to sellers.
Once you get pre-approved for a home loan, the seller knows you’re a better prospect than someone who hasn’t begun negotiating with a lender. Pre-approval is also helpful when you’re hunting for a house. If you have a pre-approval amount of $240,000, for example, you know not to waste your time shopping for a $400,000 home.
Is Pre-qualification the same as pre-approval?
A pre-qualification is a good indication of creditworthiness and the ability to borrow, but a pre-approval is the definitive word. A mortgage pre-qualification is usually based on an informal evaluation of your finances. You tell the lender about your credit, debt, income, and assets, and the lender estimates whether you can qualify for a mortgage and how much you may be able to borrow.
Pre-approval is the next step if you get a thumbs up during pre-qualification. During the mortgage pre-approval process, a lender will pull your credit report and review documents to verify your income, assets, and debts. If you are confident about your credit and financial readiness to buy a home, then you might skip the pre-qualification step and go straight to the pre-approval and start shopping for a home.
A mortgage pre-approval is an offer by a lender to loan you a certain amount under specific terms. Pre-approval is not a guarantee you will be given a loan and the mortgage can still be denied. A home appraisal must be completed before a loan can close to ensure you aren’t paying more for the home than it’s worth.
Also, the lender’s offer may not stand if your financial situation changes between pre-approval and closing. Keep in mind that it can take several days or longer to get preapproved for a mortgage. The timeline varies by lender and how quickly you are able to provide the lender with the information it needs, including proof of your income and assets.
When you are ready to make offers, a seller often wants to see a mortgage pre-approval and, in some cases, proof of funds to show that you’re a serious buyer. In today’s competitive market, sellers have an advantage because of intense buyer demand and a limited number of homes for sale; they may be less likely to consider offers without pre-approval letters.
According to the National Association of Realtors (NAR), homes are receiving an average of 5.1 offers for sellers to consider. As a result, bidding wars are more and more common. Pre-approval gives you the advantage you need if you get into a multiple-offer situation, and these days, it’s likely you will.
When multiple buyers have made legitimate offers for the same Farmington Hills MI property, the seller can choose which one they want to accept. A pre-approval letter indicates to both real estate agents and home sellers that you’re financially able to buy a home, and it’s expected that a pre-approval letter will accompany any offer you make.
How to get pre-approved for a home loan
Start by requesting copies of your credit reports. Dispute any errors that might be causing your score to be lower than it should be. If you find delinquent accounts, work with creditors to resolve the issues before reaching out to a lender for mortgage pre-approval.
A credit score of at least 620 is recommended, and a higher credit score will qualify you for better rates. Generally, a credit score of 740 or above will enable most borrowers to qualify for the best mortgage rates.
Calculate your debt-to-income ratio. Your debt-to-income ratio, or DTI, is the percentage of gross monthly income that goes toward debt payments, including credit cards, student loans, and car loans. Lenders prefer borrowers with a DTI of 36% or below, including the mortgage, though it can be higher in some cases.
Gather income, financial account, and personal information such as Social Security numbers, current addresses, and employment details for you and your co-borrower (if you have one). You will also need bank and investment account information and proof of income.
Documents you will need to get a mortgage pre-approval letter include your W-2 tax form and 1099s if you have additional income sources and pay stubs. Two years of continuous employment is preferred, but there are exceptions.
Self-employed applicants will likely have to provide two years of income tax returns. If your down payment will be coming from a gift or the sale of an asset, you’ll need a paper trail to prove it.
Understand what the lender is offering you. Make sure you understand all the terms of your mortgage. If you don’t know what something means, the lender must explain it to you. The Truth in Lending Act requires all lenders to provide you with comprehensive loan cost information so you can comparison shop.
Comparing offers from multiple lenders can help you compare rates and fees and save you thousands of dollars over a 30-year mortgage. Going through the mortgage pre-approval process shouldn’t hurt your credit score. FICO, one of the largest U.S. credit scoring companies, recommends confining those applications to a limited time frame, such as 30 days.
Time your pre-approval. A pre-approval is typically good for 90 days. Wait until you’re ready to start hunting for your house before you request a pre-approval, otherwise, you are wasting both your time and that of the lender who’s preapproving you.
The bottom line
Every step you take to gain an advantage as a buyer is crucial in a market that’s constantly changing. Interest rates are low, prices are going up, and lending institutions are regularly updating their standards.
It is important to have the information, resources, and the right team of professionals such as a loan officer and a trusted Farmington Hills MI real estate agent to help ensure that you take the right steps. If you’ve been trying to decide if now is the right time for you to buy a home, let’s connect to discuss your options.
Partner with top-rated Farmington Hills MI REALTOR® – Tom Gilliam
With a passion for real estate, Tom Gilliam has been serving Farmington Hills and the surrounding Oakland County MI area for nearly two decades. Tom is known for his friendly demeanor, dedication, and professionalism. He will be able to quickly ascertain your needs and goals and create a plan of action based on your specific criteria.
Tom’s clients appreciate his honesty and transparency and feel it helps them as they make important real estate decisions. He understands how important good communication is to every transaction and is available for his clients whenever they have questions or concerns, promptly returning all phone calls, texts, and emails.
Having someone like Tom by your side to advise and guide you means there is one less thing you need to worry about. He will protect your interests, advocate for you, negotiate on your behalf, and go the extra mile to ensure the best results possible. If you are interested in buying or selling Farmington Hills real estate or homes in the surrounding area, please give Tom Gilliam a call at (248) 790-5594 or you can reach him by email.
Tom Gilliam, REALTOR®
29630 Orchard Lake Rd.
Farmington Hills 48334