When the time comes to purchase a home, one of the most common pieces of advice given to buyers is to get pre-approved for a mortgage before beginning to look at homes. But prospective buyers who are in a hurry to purchase may view the mortgage pre-approval process as tedious or something that can be postponed until after they find the right home. In reality, nothing could be farther from the truth.
When prospective buyers make this mistake they may actually be setting themselves up for a much more difficult home buying process. This may be due to an increased likelihood that an unapproved buyer will make a bad purchase decision or that they will be far more likely to experience unnecessary financial difficulties during and after the sale process. If you are preparing to shop for your next home without taking time to get mortgage pre-approval first, the following information may help change your mind and improve your home buying strategy.
Gain a Better Scope of Financial Boundaries
Most households, especially those who want to make wise financial decisions, use some sort of budget plan or tool to help them make financial decisions and prioritize their expenses. They know exactly how much money is coming in and how much will need to paid out for expenses and bills.
In effect, a mortgage pre-approval is somewhat of a budget for home shopping in that it helps home buyers understand how much money they can afford to spend on a home. Additionally, a mortgage pre-approval by a reputable lender will also help home buyers understand the ongoing costs of home ownership and how these costs will fit into their overall financial picture. This helps to ensure that buyers will not find themselves owning a home that is unaffordable to live in due to recurring costs of home ownership or other financial commitments they may have.
What to Know About the Debt-to-Income Ratio
Debt-to-income ratio (DTI) affects the home buyer's ability to get a mortgage. Buyers who have too much debt may not qualify for a mortgage because homeowners who are heavily in debt are at greater risk for defaulting on their mortgage payment.
Debt-to-income ratio is calculated by comparing the amount of money that the buyer pays in monthly debts to the amount of money that the buyer makes in a single month. Typically, lenders will not give borrowers a mortgage if their debt-to-income ratio with a mortgage payment would be more than 43%.
Home buyers who want to get a mortgage and who have too much debt can either pay down some of their debts or can find a way to increase their income. It's important to work with a lender when trying to calculate debt-to-income ratio. A good lender can help a buyer determine the best way to reduce DTI.
Best Positioning to Negotiate Price and Terms with Sellers
Adding proof of mortgage pre-approval to a purchase offer adds positive weight that home sellers will take seriously. This is especially important in highly competitive real estate markets like Calgary's City Centre where there are multiple buyers vying for the best homes. Sellers who are working to sort out the best offers will usually consider offers with mortgage pre-approval as having more value than those without it, even when the unapproved one is a higher offer. Since sellers feel that mortgage pre-approval indicates that the buyer is serious about the purchase of their home, they are much more willing to negotiate fairly with them than an unapproved buyer.
Avoid Unnecessary Fees or Embarrassment
The mortgage pre-approval process is also excellent protection against the potential for embarrassment for home buyers. A good example of how mortgage approval can help protect buyers is when an unapproved buyer's offer is accepted only to later be voided because they cannot obtain a mortgage. In addition to embarrassment, buyers in this situation may also be subject to legal issues, should the seller feel they have lost out on valuable market time.
A number of reasons can deny mortgage applicants an approval, including recent job changes, inadequate income, credits issues, divorce, and many other factors. Taking the time to get pre-approved before shopping for a home eliminates this type of unpleasant surprise.
To find out more about the benefits of having a mortgage pre-approval before shopping for a home, buyers should speak with their real estate professional. Their agent will be able to help them fully understand these and other reasons why mortgage pre-approval is so important, as well as help them find a reputable lender who can guide them through the approval process.