Understanding Mortgage Loans: Pre-Approval and Amortization
So, you’re ready to take a leap of faith and buy a home. This type of life change can be as stressful as it is exciting, but if you know what to expect financially, you can budget and search for your dream home accordingly.
Before you start your search, take a thorough look at your finances and how much you can spend on a home. Think about the monthly mortgage payment you can comfortably afford. Once you have a ballpark figure in mind, it’s time to visit a mortgage lender.
As part of this budgeting process, it’s a good idea to seek a preapproval letter, or PAL, from a mortgage company. A PAL will tell your real estate agent the mortgage amount you qualify for, so your agent can help you find properties in your budget range.
The amount of your preapproval is determined by pulling your credit report, which will show your credit score and any current debts you have. Lenders also look at the amount of income you have based on wage documentation from records like your pay stubs and bank statements. Your income is then compared to your outstanding debt (student loans, car payment, etc). This is called your debt to income, or DTI, ratio.
Lenders use the DTI ratio to determine how much of your income can reasonably be spent on housing expenses.
It’s important to note that just because you’re approved for, say, a $200,000 mortgage doesn’t mean you have to take out a loan for that amount. Your preapproval letter can easily be changed if you find the perfect house for $150,000. This way, the seller doesn’t have to know the amount for which you’re approved.
Additionally, buying a home that’s less than your preapproval amount may mean you’ll have more leeway in your budget for your monthly house payment. This infographic shows just how far paying a little extra can go.
Taking control of your finances early in the process can help guide your search for the home that’s just right for you. Once you know the loan amount you’re preapproved for, and whether your budget allows you to pay more than your monthly bill, you can take the next step in the homebuying process: finding your dream home!