Pre-Qualification vs. Pre-Approval
The terms pre-approval and pre-qualification are used interchangeably, however they are not the same thing and every home buyer should know the difference. You should at least have one of the two before looking at any properties. Typically the first question a real estate agent will ask you is if you have been pre-qualified or pre-approved for a loan, and if you haven’t, they will most likely recommend you a variety of mortgage lenders to speak to about getting one.
Pre-qualification is the first step in the mortgage process. Based on the financial information that the consumer inputs, the lender will give a pre-qualified mortgage amount. This DOES NOT include an in-depth financial analysis. Because of this, pre-qualification will only provide an ESTIMATE of how much you can borrow. It is not a sure thing because it is based off the information you provided with no credit check. Getting pre-qualified typically has no cost involved and usually only takes one to three days. It is a chance to discuss options with your mortgage lender as well, including different types of mortgages. A pre-qualification letter is typically required alongside an offer to purchase a house.
Pre-approval would be the next step after pre-qualification and it includes the buyer filling out a mortgage application with necessary documentation. The lender will conduct a financial background and credit check to approve the buyer for a specific amount. You will receive a conditional commitment for an exact loan amount which will enable you to look at homes above or below that price. This will also make an offer stronger to a seller since you are one step closer to receiving a mortgage.
Note: The author is not a mortgage lender. This information is a general guideline. Please contact a mortgage lender regarding any specific inquiries or details on obtaining a mortgage loan.
How Much Can You Afford?
Pre-qualification or pre-approval for a mortgage is the best way to determine how much you can afford when buying a house. However there are still some other things you can consider such as other debts you may have, down payments, and closing costs.
A good rule of thumb is that you can afford a mortgage that is 2 - 2.5 times your annual gross income.
Example: Someone who earns $80,000 in gross annual income would be able to afford a mortgage of $160,000- $200,000. However, this is not always the case, there are a lot of things this rule does not take into account. It is just a general guideline.
The next thing to consider is your front-end ratio and your back-end ratio. Your front-end ratio is the percentage of your gross income that is dedicated towards paying your mortgage. This is also known as your PITI payment. PITI stands for Principle, Interest, Taxes, Insurance and are the four components that make up a mortgage loan. Typically this payment should not exceed 28% of your gross income.
Example: If your monthly gross pay is $3,000, your mortgage payment should not exceed $840 (3,000 x .28).
Back-end ratio, or debt to income ratio (DTI), is the percentage of gross income used to cover all other debts including car loans, student loans, credit cards, etc. Most lenders like your DTI to be below 36% of your gross income.
Example: If your monthly gross pay is $3,000, your monthly debt expenses should not exceed $1,080 (3,000 x .36).
Another thing to consider is how much you want to place as a downpayment on a home. FHA loans require a minimum of 3.5% downpayment. With FHA loans, keep in mind that you could end up paying an mortgage insurance premium as well. Conventional loans require private mortgage insurance (PMI) if the downpayment is less than 20%. If the downpayment is 20% or greater no PMI is required. It is best to consult a mortgage professional to determine which loan is right for you.
Lastly, one should consider closing costs. This is typically always forgotten when thinking about purchasing a home. Usually closing costs amount to around 2-4% of the purchase price of the home. In the example below 4% of the purchase price is used to calculate closing costs.
Example: You purchase a house for $200,000, with a 20% downpayment ($40,000). You’re receiving a mortgage to cover the remaining $160,000. Closing costs would be around an additional $8,000.
Closing costs can include appraisals required by the lender, loan origination fees, title search, inspections, lender fees, taxes on the deed, etc.
Note: The author is not a mortgage lender. This information is a general guideline. Please contact a mortgage lender regarding any specific inquiries or details on obtaining a mortgage loan and/or closing cost concerns.
My name is Erika D’Argenio. Originally from the Washington DC area, I relocated to South Florida to enjoy the warm weather, beautiful beaches, and diverse culture. Prior to entering real estate, I was an elementary school teacher which gave me the ability to recognize and value the trust and confidence that individuals place in me and gave me the discipline to exceed those expectations each day. As an empathetic, hardworking, and trustworthy professional, I will help you maneuver one of the most significant and stressful life events of buying or selling a home with ease. By working with Coldwell Banker, my expertise in market knowledge and online marketing allows me to help buyers and sellers make confident decisions in today’s real estate market.
I strive to do more than just help buyers and sellers, I strive to establish a life long relationship with customers through my enthusiasm, professionalism, and positivity.