How Mortgage Pre-Approval Determines How Much Home You Can Afford

Mortgage pre-approval is a critical step when you’re buying a house, and obtaining it early can give you a leg up in the buying process.

Pre-Qualification vs. Pre-Approval

Pre-qualification and pre-approval are not the same, though they sound deceptively similar, and are a part of the same process

Pre-qualification is an estimate of your potential loan size, based on your personal finances and calculated by a lender. Pre-approval is done when lenders are confident that you’re a serious buyer and capable of repaying your loan.

With pre-qualification, the lender takes a cursory look at your finances, with fewer steps for verification. Pre-approval is a more involved process; lenders will make formal inquiries to determine if they want to grant you a loan.

How Lenders Evaluate Your Eligibility

Before they agree to grant a letter of pre-approval, lenders will look at your financial history, or creditworthiness, to assess your eligibility. Some of the factors involved in that decision include your credit score, debt-to-income ratio, and income.

The better your credit score, the lower your DTI, and the more stable your income, the more creditworthy you are in the eyes of a lender, according to Experian. They use these factors to identify how likely you are to default on your loan, and to decide how much to lend you.

Being considered creditworthy by a lender gives you more buying power; you’re more likely to receive a higher loan, as well as lower interest rates and fees. It can also give you a clearer understanding of how much home you can realistically afford.

Common Pitfalls that cause Challenges with Pre-Approval

Pre-approval isn’t without its challenges; not having a full understanding of the process can lead to accidental setbacks. For example, switching jobs can cause difficulties by requiring your new income to be proven, potentially delaying the process.

Missing payments and taking on more debt are easy ways to make pre-approval more difficult as well. They harm your DTI, which in turn makes you a higher risk borrower that the lender may hesitate to work with.

Both applying for new lines of credit and closing existing ones can impact the pre-approval process. New lines of credit add to your existing debt, and though it seems counterintuitive, closing existing ones can negatively impact your credit score.

Pre-approval being such an early step in the process means that whether you receive the letter or not, you’ll still have a better understanding of how much home you can afford. Being patient, assessing your credit, and proper budgeting can help you get that letter and start making offers.

To learn more about mortgages and the home buying process, visit newhomesource.com/learn.