The Power of Pre-Approval

People ask me all the time: I'm in a lease for another 3 months, don't you think it is too early to apply for pre-approval? My answer is always the same: NO! I have many reasons for saying this. For the sake of time & simplicity, I will explain the three most important here.

The primary reason is that you need to find out if you qualify to purchase a home now. If not, you will have several months to work on what is needed to qualify. Reasons that you may not qualify right now could include: Lack of down payment, lack of job history, low credit scores, etc. Wouldn't you like to know if you need to do some work to qualify before you go out looking for homes? Or much worse, before you find the dream home? You'll save yourself and your Realtor quite a bit of time by applying for financing first!

Okay, so you've made up your mind. You're ready to pursue the American dream of homeownership and you've brought me to my second reason to apply for pre-approval prior to home shopping. Wouldn't you like to know exactly how much you can afford? Would you like to find out all of the expenses that are associated with owning a home? A good loan officer will provide you with this information at the time of pre-approval. This person will ensure that you are shopping in the price range that you are financially comfortable with. Remember, you'll want to put furniture in this home too! Nobody wants to feel "stretched" to make their mortgage payment every month. A thorough loan officer will explain the 5 components of a monthly house payment with you.

The five components of a house payment
1. Principal & Interest
2. Property Taxes
3. Hazard Insurance (theft, fire, etc.)
4. Private Mortgage Insurance (if you finance over 80% of the sales price of a home)
5. Condominium Maintenance Fees (if applicable)

When you add these five components together, you come up with your total monthly house payment. Now, wouldn't you like to know all of this before you find that dream home? I know I would. If more loan officers had explained this in years past, maybe we wouldn't have this current foreclosure crisis on our hands.

Okay, so let's briefly explain each component of the total monthly mortgage payment.

1. Principal & Interest is what you pay directly to your lender each month. The principal portion goes to reduce the balance on the loan, thereby creating "equity" in your property. The interest portion goes to your lender to compensate them for making the loan to you.

2. Property Taxes (aka Real Estate Taxes) are paid to your state and local governments and schools to fund worthwhile projects.

3. Hazard Insurance will be required by your lender and will protect you from fire, theft, etc. Most lenders will allow you to choose your own insurance agent for coverage.

4. Private Mortgage Insurance (aka PMI, MI) is only applicable when you finance over 80% of the sales price of a home. This is a fee that you pay to your lender so that they can obtain an insurance policy protecting them against loan default.

5. Condominium Maintenance Fees (aka HOA Fees, Homeowner's Association Fees) are only applicable if you purchase a condiminium or certain townhouses and co-ops. This is a fee that you pay each month to the association that manages your property. This will pay for things such as lawncare, security, and pool maintenance.

Last but not least, my third reason for obtaining pre-approval before you begin shopping for a home. Now, here's something your Realtor will thank you for. You've found the perfect home and your ready to make an offer. How do you structure that offer? Let's suppose you've met with your loan officer and he/she has determined that it will be best for you to request that the seller pay a portion of your closing costs. Maybe you have recently graduated college and you haven't been on your job long enough to have saved for closing costs. Well, here's the good part. It is possible to ask the seller to pay up to 6% of the sales price toward your closing costs. Let's say the dream home will cost you $150,000 and your closing costs will be $4,500. In this situation, the seller will be able to contribute enough to cover your closing costs ($4,500 / $150,000 = 3%, which is less than the maximum of 6%). You will only be required to come up with $500 to purchase this home. Here's how: You request 100% financing from your loan officer. When preparing your contract, your Realtor negotiates for the seller to pay $4,500 for closing costs. You put up a $500 deposit for earnest money and you have your dream home.

As I have outlined above, it is important to visit with your loan officer to discuss your home financing before beginning your home search. Summer in St. Louis is right around the corner!


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