Tuesday, May 22, 2012

Getting Pre-Approved Focuses Your Search and Saves Time

Pre-qualifying Focuses Your Search and Saves Time

Sellers today really don't want to accept an offer unless they can be assured the buyers can qualify for a mortgage and pay the closing costs. It's easy to get pre-qualified.

You can call Lending Tree, Chase (1-800-Chase-24), Wells Fargo and many other banks right over the phone and give them some basic personal information such as your income; debt such as auto loans and credit card balances, how much money you have for a down payment and closing costs and they can quickly calculate the total monthly amount that you can spend on housing. When you get that number, remember that has to cover principal, interest, taxes and insurance. If you are buying a condo the structural insurance is typically covered in the monthly maintenance fee. Be sure to add that in. Here is a quick example:

Lets say you have $100,000 for a down payment $12,000 for closing costs. You earn $125,000 a year and have an auto loan with a balance of $10,000 that has a monthly payment of $90 a month. Let's say you are buying a $500,000 condo with $100,000 down at 6% on a 30 year fixed rate loan. The monthly principal and interest will be $2,398. Let's say the monthly maintenance is $182 and the unit has $5,000 in annual real estaate taxes or $417/month. Adding the monthly tax with the monthly maintence and principal and interest, we get a total housing payment of $2,996.

If you make $125,000 per year that's $10,416 per month. Adding your auto loan payment of $90 to the total expected housing costs, we get $3,086. Your monthly income divided by your monthly debt is called your debt to income ratio. Banks look at this to determine if you can afford a given mortgage payemnt. $3,086/10,416 = 29.6%. This is well below what is allowable for conventional and FHA mortgages.

Lenders offering conventional loans will typically lend up to 29% debt to income for the housing payment to income and 36% debt to income including housing and all other debts. So in our example, the debt to income ration for just the housing payment of $2,996 over the monthly income is 28.7% and 29.6% including the auto loan. So, our client in this example can afford a $500,000 condo.

To get pre-approved vs. pre-qualified you need to authorize the bank to pull your credit bureau so they can verify your FICO score and all of your debts. They may also ask you for a pay-stub and W-2 and will issue a pre-approval letter. Pre-approvals are worth more when you are making an offer as the seller will know that you have good credit and have disclosed to the bank all of your debts. Unfortunately, some people don't remember to disclose all of their credit card balances or disclose that auto loan that they co-signed for their brother or they forgot all about how they were a little sloppy paying their student loans and didn't realize it would show in a low FICO score.

Knowing this information, you can go to a realtor and only look at what you can afford. It helps set your expectations and saves time....

If you found any of this confusing, I would be glad to run numbers for you. I was a loan officer and underwriter at Chase in the early '90s and underwrote over 3,000 purchase and refinance transactions.