Purchasing a new home is confusing at best, however beginning the process without a clue is not going to help you either.

Getting “Pre-Approved” for a home loan is where most would be home owners begin, and most realtors will even ask for your pre-approval letter from your broker or lender.

Loan pre-approval is not all it’s cracked up to be (same with no closing cost loans and those new 1% mortgage loans), however we are going to focus on the pre-approval concept and pick it apart a little here so you have a better understanding and avoid the pitfalls.

You’re Pre-Approved for A $350,000 Mortgage — Let Us Know When You Find The Home Of Your Dreams

Yes, you could hear that soon after asking for a pre-approval — but I wouldn’t put much weight on it.

Oh sure, that crisp new letter you received from the loan officer looks professional, even official. It’s really just designed to keep your realtor happy and make you believe this is easier than you thought.

Don’t get me wrong, buying a new home CAN be easy — but not if you start out by doing the stupid home owner mistake of ASKING for the pre-approval up front.

Many times, your realtor will require a pre-approval letter before they’ll even show you a home. I’m going to suggest you’ll want just a little more in depth look as opposed to just asking a loan officer if you qualify for $X.

Let’s Take A Look At What’s Going On Behind The Scenes During Your Pre-Approval

If you spend any time at StupidHomeOwner.com you’ll know that I focus on the “Three Pillars Of Your Mortgage”.

Those pillars are;

1. Your credit score and overall credit profile
2. Your debt to income ratio (your total monthly expenses in reference to debts that show as liabilities on your credit report divided by your total monthly income)
3. The home value

When you ask for a pre-approval from your lender or broker, they simply look at those three values and make a quick determination on your ability to afford a certain amount of financing. That’s typically it. Some will run your numbers through a lender or two to see if you fit the lending guidlines however not always.

To be honest with you, not many mortgage loan brokers or loan officers are willing to put a ton of work into getting you “pre-approved” with all of the available lenders and options if you have NOT committed to doing business with them in the first place. From the brokers stand point you haven’t even found a home yet and him earning your business is a shot in the dark at best.

One specific difference you should note is what differs between a “pre-approval” and a “pre-qualification”.

Pre-Qualification is a simple look at the three pillars and a Pre-Approval is the act of getting a specific lender or wholesale lender to pre-approve you specifically based on some deeper criteria such as how much you have in liquid assets (401K for example), how long you’ve been employed and whether you’re self employed or not.

Now, knowing that the pre-approval requires much more work on the loan officers part you should not accept a pre-approval letter unless you’ve provided the extra details such as employment length, liquid asset amount, etc. OR what you’ll really have is only a pre-qualification which carries no weight other than saying you “might” be qualified for X amount. I might even suggest that you ask for the specific lenders approval commitment proving the lenders intentions. That’s not easy to get but possible if you require something showing the lenders approval.

The loan officer can provide you with a copy of your credit report (see the main menu for how to read your credit report) and you yourself can determine your debt to income ratio by calculating as described in pillar 2 above.

Shooting for a debt to income ratio (DTI) of 45% or less is the best lender sweet spot. The point being, if you know your DTI is 58% and the lender is quoting you the lowest rate available, you know it’s a lie just to earn your business.

In conclusion, know your three pillars (credit, DTI, home value) and you’ll be much more able to see the lies coming and not be blind sided at the closing table because everything changed.