Be decisive, Buying houses, First time homebuyer, Investments, Planning, Smart money

How to control your pre-approval process, and come out ahead.

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When you are a part of a gift exchange at work, or with your extended family, and there is a max budget for the amount to be spent on the gift, what happens? Most people feel like the max budget is how much they have to spend. If the budget is $30, most likely everyone spent the full $30. Even if that budget is simply to make sure people don’t over spend, it somehow becomes the minimum budget for most people.

This is what can happen when you get pre-approved for a home loan. You fill out your application, give all the information and documents needed to get pre-approved and you are told the maximum amount you can borrow for your home purchase. I can tell you from first hand experience that a lot of the time, this amount becomes the homebuyer’s budget. But, when getting pre-approved, does the bank take into account how much you want to save towards retirement or  how much you need to save to go on the awesome trip you’ve been planning to Brazil? Nope, they only look at your debt to income ratio, and your credit score (of course there’s more to it, but these are the big ones).

So, should you spend the full amount you can get approved for? Not exactly.

How to get pre-approved safely:

  • Sit down and go over your finances and budgets for each month (if you are purchasing a home with someone, a partner, spouse, friend etc. make sure they are there for this)
  • If you don’t have a budget, make one! Look at your spending from previous months and get an idea of how much you need to get by.
  • Make sure you leave room in your budget for retirement, travel, emergencies, and fun. You don’t want to be “house poor”.
  • Once you have a full understanding of your current finances, figure out how much you feel comfortable spending on a monthly payment for your mortgage.
  • Go into your lender, share with them that you would like to get pre-approved but that you don’t want to know how much you qualify for, but would rather know how much house you can afford with your set monthly payment.

For example, when Zach and I bought our first house, we didn’t even know what our max pre approval amount was. Before we went in we sat down and figured out that we didn’t feel comfortable paying more than $1,000 a month on our mortgage, we then worked backwards from there with the lender. After meeting with the lender, we then had a breakdown of how much house we could afford including taxes, insurance, and HOA’s. We then told our real estate agent what our price range was and what we were looking for. Our final payment was less than $1,000 and we weren’t stressed each month about how we were going to be able to pay the mortgage.

It’s so easy to get swept up in the momentum of home buying and the excitement over how much your money can buy. So my advice to you is to be cautious. Really know what your comfort level is, and don’t go looking at houses unless they fit within your confines!

 

 

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