What is going on lately? More and more people are eagerly calling asking how much home they can buy and they want to throw a couple numbers around and get a quick answer – “I make about $85k a year and I have a small credit card. I’m looking at a home for $485,000 and my wife and I want to put an offer on it TODAY! The online mortgage calculator said I qualified, can you send me a preapproval?” So let me get this straight…. You want someone to loan you nearly half a million dollars with a quick phone conversation? People selling a used street bike require you to show more documentation (driver’s license, cash in hand). I just don’t get it!
In my book, “Buying a Home, Secrets Revealed” the very first chapter I write about the 6 most expensive mistakes I’ve seen home buyers make over the 14 years I’ve been in this profession. Not getting pre-approved is NUMBER ONE! Here is an excerpt from my book:
Let me be clear: there is a major difference between a pre-approval and a pre-qualification. Those are two entirely separate things!
Most of the frustration in buying a home can be traced to the confusion between these two terms.
Here’s what these terms really mean:
A pre-qualification means that someone answers questions about their debts, income, and other relevant information. They might even bring in a pay stub to “prove” their income. But nothing is officially checked or documented.
A prequalification is going on the “honor system.”
Based on the information given to them by the client, the loan officer will tell them if they would qualify for a home…..in theory.
This does NOT mean you are guaranteed to qualify.
Almost anybody can be prequalified, but an actual pre-approval requires more due diligence. A pre-approval is more “official” than a pre-qualification.
A common (and tragic) scenario is buyers going out to look at homes with a realtor because they are prequalified…but not preapproved. They think they are officially qualified to buy a home. But sometimes that’s not true…
Maybe their debt to income is higher than they stated, because they forgot to mention a $700/month child support commitment. Maybe they’ve only been at their job for a month, so there isn’t enough official income history. Most of the time its not a result of the buyer being dishonest or exaggerating their income – it’s because of the way lenders consider various types of income and expenses.
Take Donna the flight attendant as an example. A pretty straightforward scenario; she’s a W2 employee of a major airline for the last 6 years and makes $54,000 a year. She has a small car payment and is carrying a $4,000 balance on her credit card. She said she just recently purchased the car and the car dealer said her credit was 740. At face value she seems a perfect candidate and qualifies nicely. However the difference between pre-qualify and pre-approve is in reviewing and verifying the application information with proper documentation. Upon reviewing Donna’s tax returns it turns out that she writes off “un-reimbursed employee expenses” to the tune of about $9,000/yr AND she has a ‘side business’ of over priced smelly candles. It turns out that business isn’t all that profitable and creates losses against her tax returns. Good for taxes; bad for getting a mortgage. Because of these two things, her qualifying income is reduced by nearly $1000/mo. This dramatically increases her debt-to-income and she doesn’t actually qualify for the amount that a pre-qualification would indicate.
Whatever the reason, here’s what you need to remember: a prequalification is NOT the same thing as an official pre-approval.
BEFORE YOU START HOUSE HUNTING, get a full pre-approval. This alone will prevent nine out of ten potential problems that come up during the financing process. Oh and here’s a tip…. work with a lender that will advise you on how much home you can AFFORD, not just how much the banks tell you that you can buy.
Stay tuned for WHAT a pre-approval looks like (it’s less painful than you think!)
What are the other expensive mistakes home buyers make? If you want a free copy of my book, go to www.mymortgageguytony.com.