If you’re like most buyers, you’ll need to obtain a mortgage before you can purchase a home. While the process doesn’t have to be stressful, it can come with a few unexpected hiccups. These challenges arise partly due to common misconceptions about home financing. The good news is, knowing what to expect can make each step simpler—and help ensure a successful closing day and homeownership journey.
If you’re preparing to buy your first home, here are five things you should be aware of when you’re applying for a mortgage…
1) Pre-approval isn’t the same as pre-qualification
Many mortgage seekers assume pre-qualification and pre-approval are one and the same. They’re not. Simply put, pre-qualification is the process by which a lender assesses your finances to estimate the loan amount you’ll qualify for. In contrast, pre-approval takes you one step closer to being fully approved. While it’s not a guarantee, it is a tentative agreement from a lender to provide you with financing (and a signal to sellers that you’re serious about your purchase).
2) Your pre-approval amount may not be your budget
Another common home-hunting mistake is using the amount you’re pre-approved for as your maximum purchase price. Depending on your circumstances, setting this number as the top of your range could strain your finances. The truth is, you know your lifestyle better than anyone else, which puts you in the best possible position to estimate your future expenses. While your pre-approval amount is a useful thing to know, you should treat it as a starting point when you’re budgeting.
3) Your appraisal matters
After your offer is accepted, your lender will have the home you’re planning to purchase appraised. Unfortunately, many buyers fail to consider the possibility that the value the appraiser arrives at could be lower than their bid. If that happens, you’ll likely have to make up the difference yourself. To avoid this outcome, talk to your real estate agent about how adding home-buying conditions to your offer can protect you.
4) You don’t have to stick with your bank
Banks aren’t the only places to obtain financing. Brokers, credit unions, and dedicated mortgage lenders all come with distinct advantages, and knowing what they are can help you make a more informed decision. Many home hunters decide to work with brokers, who can shop around for the best rates and conditions (whereas banks can only offer their own products). The bottom line is, be sure to do your homework!
5) You should hold off on big purchases
Being pre-approved doesn’t necessarily mean you’ll close successfully. Even after you’ve submitted an offer and the seller has accepted it, making moves that could impact your finances can affect your approval status. That’s why it’s always a good idea to hold off on substantial purchases (like a new car or large appliance) prior to closing. The same is true of opening new lines of credit, and even changing jobs—since the decision to pre-approve you is based partly on your income and financial reliability.
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