Did you know that there’s a huge difference between being pre-qualified and pre-approved? In this video, we’re going to share three reasons why making sure you’re pre-approved will help you get the best deal possible on your new home. We’ll also discuss how interest rates affect your monthly payment and explain the pros and cons of each loan program to see what’s best for you.
Pre-Qualified vs Pre-Approved
An important part of getting a good deal on your home is getting your offer accepted. The most important part of getting your offer accepted is having your financing secured. If you’ve filled out a questionnaire on an app or website that tells you you’re pre-qualified, that doesn’t mean you’re good to go. Being pre-qualified is not the same thing as being pre-approved. There are three main reasons why you need to make sure you’re pre-approved and not just pre-qualified.
#1: A Pre-Qualification Letter Is Worthless
A pre-qualification letter is worth less than the paper it’s printed on. It doesn’t mean anything, and frankly, in this market, it’s just not going to get your offer accepted. On the other hand, when you’re pre-approved it means that you’ve submitted your income and your assets and they’ve been verified. It basically means that you’re 99.99% guaranteed to get the loan on your home.
#2: It’s Important For Your Budget
Reason number two to get pre-approved is that you need to have your budget dialed in. There may be things that you’re not considering, like taxes, insurance, and mortgage insurance, that aren’t being calculated correctly. Even if you can be approved for the mortgage you want at those numbers, it may completely misalign with your financial goals. Getting pre-approved will allow you to shop with confidence, knowing exactly how your numbers break down and making sure you don’t get in over your head. The last thing you want to do is make a poor financial choice.
#3: You’ll Have More Leverage
Third, a pre-approval will allow you to have more leverage. Imagine for a moment that you’re the seller and you have two offers that come in on your house. Each offer looks exactly the same, but one has a pre-qualification or pre-approval letter and the other is from us with a $5,000 guarantee. Which one are you going to accept?
Securing The Best Rate
As a home buyer, you—like us—are going to be concerned about your rate. Of course, I don’t want you to be all consumed by what your rate is, as there are other important factors for us to discuss too. Before we get into this, let me share a scenario that happens with us every single month.
We have a client that saved 10% to put down on their house. They also have some credit card debt that they’re paying on with 12%, 13%, and 20% interest rates. When we look at their scenario and analyze that credit card debt, we are often able to show them how they can pay off those high-interest credit cards in cashflow substantially better every single month. This will set them up for more success.
Obviously, the higher the rate that you pay, the more your monthly payment is going to be for the same loan amount. Most loans are amortized over 30 years at a fixed-rate. Even just 1/8th of a point means a change in your monthly payment. For every 1/8th of a point increase that you have on your mortgage per $100,000, your rate is going to go up by $7. And for every $10,000 you finance, your payment’s going to go up by $50 per month.
If you were looking at putting down 10% on a $200,000 mortgage, that’d be $20,000 down payment. If you put down 5% versus 10%, the difference in your payment is $100 a month. When you’re dealing with a mortgage advisor, however, we’d explain to you that you can take that $10,000 and pay off other high-interest rate or high-payment debt. We could help you cash flow hundreds of dollars a month in your favor, making your home and your finances incredibly more affordable. I want to bring up these factors for you because I want to make sure that you don’t lose out on your dream home over $50 a month. When you can pay $10,000 more—if that doesn’t substantially move the needle for you—or if we can align your debts to pay off things in a more efficient way, that could save you more than that $50 a month in the longterm. And since 1/8th of a point per $100,000 is going to affect your monthly payment by $7, that’s just an extra $21 per month of a $300,000 loan.
Loan Program Options
Now that you know how interest rates affect your payment, let’s talk a little bit more about the different types of loan programs. Buying a home is not difficult, but it can be confusing to break down and decide which of the three main loan programs are best for you. Those three loan programs are VA, FHA, and conventional mortgages. Each of those loan programs comes with their pros and their cons, and based on your financial situation, a mortgage advisor and a mortgage team like ours can make sure that you’re in the right program for success and your financial goals.
#1: VA Loans
First, let’s talk about VA loans. If you’re a veteran, I first want to thank you for your time and service. Hands down, this is the best loan on the planet. You have to have served our country to qualify for this mortgage, and it’s one of the things that the government does incredibly well to make sure that our veterans are served. So if you a veteran or you know a veteran like my dad, we would be honored to work with them and to serve you. And again, we thank you for serving our country.
#2: FHA Loans
FHA loans have a low down payment, generally at 3.5%, and they’re often used by first time home buyers or for buying multifamily homes. We also often couple FHA loans with renovation products as well too. FHA loans cater to people who want to make low down payments or have aspirations of being long-term landlords; you can buy a multi-family house at up to four units with just 3.5% down. Rates are extremely competitive on FHA loans, but there are some cons too. Mortgage insurance on FHA loans is generally more expensive than mortgage insurance on conventional loans, though we’ll break down those numbers for you when you talk to our team.
#3: Conventional Loans
Conventional loans generally require a 5% down payment, although there are quite a few instances where we can do it with 3%. Also, the mortgage insurance on conventional mortgages is a fair amount cheaper than the mortgage insurance on FHA loans, as we said. This does greatly depend on what your credit score is, though, which is why many people who are just starting to build their credit opt for the FHA loan as it can be cheaper in those circumstances. The biggest con for a conventional loan is simply qualifying. If you don’t have a larger down payment or your credit score is not right, it’s just not the right product for you.
Preparing Ahead For The Best Deal
The truth is that it’s never too early to start preparing for your home purchase. The earlier you start preparing, the more success you’ll have when you start shopping. If you are looking for the risk or benefits versus locking or floating today, call us and we’ll explain exactly what the market’s doing.
I hope this has helped you understand rates, how they affect your payment, and the loan programs that you have at your fingertips so we can set you up for success. If you have any questions, feel free to reach out to us and we’ll be happy to connect. We are here to help you and we’d be honored to earn your business.
Call the SeanZ Team
The Sean Zalmanoff Mortgage Team specializes in making the home purchase or refinance process a great experience.