It is crucial for you to know how much a lender will finance and how much you can afford to borrow, two very different things, in advance of even starting your property search. That way, you can save time, energy and avoid a potential heartbreak.
Using a pre-approval can help you identify your target price range, identify your monthly mortgage payment and avoid surprises in your credit report that might otherwise create a challenge.
Ask Jackie about another advantage you can gain through the pre-approval plus DU.
Many Buyers think that once a lender pre-qualifies or preapproves them for a mortgage, the loan is guaranteed. That is not the case.
A pre-approval simply means that the official mortgage application has been completed and the lender is pending additional loan documentation from the Buyer. Also, at the preapproval stage, the lender has not yet performed an extensive check on your current rating. The pre-approval stage gives the Buyer an idea of the interest rate that will be charged on the loan and the maximum purchase price for the home.
What is a DU?
Desk Top Underwriter (DU) is an automated underwriting system developed by Fannie Mae that enables mortgage lenders and brokers to make better-informed credit decisions at the entry stage of the loan process as well as throughout the loan process.
All your financial, personal and work information is entered into DU. The information is then analyzed and recommendations are provided, so the loan can meet the specific minimum guidelines required to be approved. If the DU recommendation does not meet the guidelines, the report will specify why the loan did not meet the criteria.
When a Buyer is able to provide a DU approval along with a letter of pre-approval, the offer becomes much stronger. Realtors and Sellers are more confident and inclined to accept an offer knowing the Buyer, as well as the mortgage broker, have taken an extra step. They have not just completed a loan application, but have provided loan documentation that has been reviewed and approved prior to shopping for a home.
Please keep in mind that a DU approval is not a guarantee for FULL loan approval as loans are subject to a preliminary title report on the property, and an appraisal, and all the information must be verified by an underwriter.
Common terms defined:
PITI (Principal, Interest, Taxes, and Insurance): the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner’s and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.
PMI (Private Mortgage Insurance): privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.
LTV (Loan to Value (LTV) Ratio: a percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.
Appraisal: a document from a professional that gives an estimate of a property’s fair market value based on the sales of comparable homes in the area and the features of a property; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.
Appraised Value: an estimation of the current market value of a property. Market Value: the amount a willing buyer would pay a willing seller for a home; an appraised value is an estimate of the current fair market value.