Home-Buying Process:
Financial Readiness
Pre-Qualification or Pre-Approval
After researching the different types of loans and where they are available, consider getting pre-qualified or pre-approved. It is common for consumers to confuse these financial reviews. The main difference is that pre-qualification gives you tentative approval and pre-approval is a definite approval. Both types will give you an estimated loan amount for which you qualify. Take the pre-qualification or pre-approval letter to your real estate professional and he or she can show you houses in your price range.
Pre-qualification — This is an informal way a financial institution can determine the amount you can borrow to finance or refinance a house. It is important to know that the financial institution is making a tentative decision based on information that has not been verified. You can be pre-qualified by giving the lender some basic information over the phone, such as:
- Employment
- Income
- Down payment information, and
- Outstanding debts
Pre-approval — This is a commitment from the lender to lend you money. The pre-approval process allows you to know how much you can borrow and tells sellers you are approved to buy a house. Pre-approval is contingent on meeting the requirements of the title, appraisal and inspections determined by the lender at the time of pre-approval.
To obtain pre-approval, assemble financial records and fill out an application. You will usually need:
- Pay stubs for the last two to three months.
- W-2 forms for the last two years.
- Tax returns for the last two years.
- Information about your assets and long-term debts.
- Recent bank statements.
- Proof of any additional income – you do not need to disclose alimony or child support payments unless you want them considered in repaying the loan.
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| mortgage affordability calculators |
If you are comfortable using a computer, you can find mortgage affordability calculators on the Internet such as the one at the Ginnie Mae website. (Ginnie Mae is the name used for Government National Mortgage Association.) The calculator allows you to enter your financial information and try various loan options such as interest rates. Mortgage interest rates affect how much you can afford. The lower the interest rate, the larger mortgage you can afford. These simple calculators allow you to see how current interest rates affect a mortgage payment.
References:
American Homeowner Education & Counseling Institute. (2000). Core curriculum: National standards for homeowner educators and housing counselors. Author.
FDIC Money Smart Curriculum. (n.d.). An adult education program – Building knowledge, security, confidence. Author.
Ginnie Mae. (n.d.). Ginnie Mae Homepage. Retrieved September 15, 2004 from http://www.ginniemae.gov/index.asp.
McQueen, K., Schneider, D., Thresher, A., Maggiano, L. (1998). Realizing the American dream. Washington DC: Neighborhood Reinvestment Corporation.
New Mexico Mortgage Finance Authority. (2004). About MFA. Retrieved September 15, 2004 from www.nmmfa.org.
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