Dallas Fort Worth Area Homes and Real Estate

Many perspective homeowners find themselves asking "When Is The Right Time To Get Preapproved For  A Mortgage?"  Getting pre-approved for a mortgage is something that many buyers put off until the last possible minute when it should actually be something that's done far in advance of looking for a new home.   Unless you're planning to pay cash for a home and don't need a loan, the pre-approval process is inevitable.   The earlier you consult with a lender in the process, the lower the chances of having a problem.  However, many people are reluctant to do this, and here are some of the main reasons why:

• FEAR THAT A CREDIT INQUIRY WILL DESTROY THEIR CREDIT SCORE OR HURT THEIR CHANCES OF QUALIFYING FOR A LOAN: This is perhaps the biggest misguided fear that I encounter as a loan officer.   Although credit inquiries do count against the credit score, that factor is given the LEAST AMOUNT of weight in determining the score.  Furthermore, mortgage inquiries do not deduct as many points as other inquries, such as those for credit cards and finance accounts.  The credit bureaus are not in business to destroy peoples' chances of getting a loan just because they apply for one.  They are looking for multiple inquiries from credit card companies and high interest finance lenders that may indicate desperation to obtain credit to pay for living expenses.  Those are the inquiries that can do the most damage.  Mortgage inquiries are almost completely a non-factor.
• THEY KNOW THEIR CREDIT SCORE IS GOOD AND ASSUME THIS MEANS THEY WILL AUTOMATICALLY BE APPROVED FOR A LOAN.  There are many complex factors that lenders consider when making a loan decision.  Good credit is one, but other factors are becoming much more important since the mortgage crisis is forcing a return to underwriting principles that put more weight on other factors.   For example, cash reserves can have a greater positive impact than a large down payment in some cases.  And high debt-to-income ratios are getting very hard to approve.  
• THE BELIEF THAT THEY SHOULD FIND A HOUSE FIRST BEFORE GETTING PRE-APPROVED.   Why look for a house if you don't know for sure that you qualify for a loan?  And even if you know your credit is perfect, what about knowing the right price range to look in based on your payment goals?  Is it a good idea for a buyer to look at  $200,000 homes when they only want a payment of $1,000 per month?  That would be looking about $80,000 above the correct price range.  So why waste that kind of time?  Many people also put way too much faith and trust in mortgage calculators found on the internet.  Although these can sometimes be helpful, many lenders leave out certain important variables, such as taxes, insurance and PMI to make the payment look artificially lower.  Taxes, insurance and PMI can sometimes make up more than 40% of the total monthly payment, so it's important to know what the TOTAL PITI payment will be, regardless of whether some of those items will be paid seperately.   

So now that we've covered the reasons why people don't get pre-approved early in the process, let's take a look at the reasons why people SHOULD get pre-approved well in advance:

• CREDIT SCORE ADVICE: A good mortgage consultant can offer many tips to increase credit scores within a few months.  Since the definition of "good credit" has changed for virtually every lender and lenders are requiring higher interest rates for many borrowers, the pre-approval process should include a counseling session about ways to optimize the credit score. 
• FIXING ERRORS AND MISTAKES: Identity theft and credit report errors are extremely common.   The vast majority of people don't discover credit report errors and identity theft until they are denied for a loan!  Unless they have monthly credit monitoring that notifies them of changes to their score or credit report data, there's no way to know for sure that their report is error-free.  Fixing an error on a credit report can sometimes take months, so it's better to get a head start on that process than wait until 30 days before closing. 
• BUDGETING AND EXPECTATIONS:  Knowing what to expect for closing costs, down payment, monthly payment and other cash that may be required as reserves is very important.  This also can give buyers a really good head start on browsing for homes in their price range on the internet way before it's time to buy, which can give them an advantage over other buyers who might make quick decisions because of poor planning.  Additionally, some buyers may want to reduce debt and monthly payments before buying, and mortgage professionals can help provide a game plan that will have the best outcome for both the credit score and the buyer's expectations.
• ESTABLISHING A RELATIONSHIP WITH AN EXPERT:  Establishing a relationship with a mortgage professional before starting the buying process can be very useful to buyers looking to keep track of trends, rates and changes in loan programs and guidelines.  Many buyers may choose to alter their game plan if they have specific knowledge of changes coming in the future.  Mortgage professionals aren't psychics, but can provide useful information to help with these decisions.  A good loan officer will make note of specific needs and keep in touch with their future prospects every couple of months to see if they have any new questions and provide information about changes in the market. 

It goes without saying that most buyers LOVE looking for a home, but despise the idea of getting pre-approved, or don't find it necessary.  Many pay a huge price in the form of higher loan rates, lowered expectations and sometimes a loan denial.  Putting off this process until the last minute can be a huge mistake, especially if their ideas and expectations they have don't jive with reality.  Ideally, buyers should begin talking to a loan officer about three to six months before they plan to buy, and twelve months or more if they suspect their credit is less than perfect or need advice on how to rebuild their credit.    Obviously their credit score can change, as well as mortgage rates, but it's a great way to have some reassurance that their credit, goals and expectations can be met when the time is right to buy a house.

BUT HOW LONG IS A PRE-APPROVAL GOOD FOR?

First, there are many aspects that lenders consider when making a loan decision.  Credit is important (arguably the most important), but employment, income, net worth and other factors also count.  A buyer must usually close within 60 days of the date the credit report was pulled.  However, employment, income and assets will be verified and updated statements must be provided in many cases, especially in situations where assets will be liquidated to show down payment and reserves. 

Additionally, every lender re-verifies employment on the day of closing since some buyers will occasionally quit their job after loan application thinking they are completely approved.  If this happens, the loan will be denied on the day of closing. 

With default rates rising, some lenders will pull an additional credit report once a loan goes to underwriting just to make sure the borrower did not take out any new, undisclosed loans or have any major credit problems.  Most lenders who do this have a policy that they will use the score from the initial credit report AS LONG AS there are no material differences in the report (such as a new car payment or account that is suddenly delinquent). 

But all of these things are going to happen regardless of when the pre-approval takes place.  The point of talking with a mortgage professional early in the process is much deeper than just getting "pre-approved" for the reasons i've stated above.  A good professional will serve all of these needs, and the process is not nearly as hard as most people think.