I have noticed a trend among my discussions that I need to address. I am not sure where the miss information is originating from, but what I do know is it is causing confusion for my borrowers, that I want to bring clarity to.
It is a MYTH, based on the way I do business, that all you need is one generic pre-approval at a max dollar amount after which you can offer and purchase any home you want at or below the approval amount you have been given!
This is a MYTH, and not in your best interest!
Honestly, if that was all it took for the approval process I would consider my job incredibly boring and super cookie cutter. What I love about my job as a Mortgage Advisor is working with my borrowers to make sure their approval is the best approval for their financial situation. I do not believe a generic approval is best. That is like saying, well Honda Civics are good and reliable so it is the only car that the car salesmen is going to sell and suggest. If the customer has X amount of money to spend, then the only option the customer would have is to purchase the Honda Civic. This route of course is the easiest route, but I do not believe it is the best route.
The TRUTH, in my opinion, is that you the borrower be given a property specific pre-approval. The reason this is my recommendation is because of the following:
1. Each property has its own characteristics. For example: if you are hoping to spend $2,000 a month on your mortgage there are many combinations of expenses that can add up to the $2,000. Do you remember when you had to do combinations in math class? For the variable A and B there was only 2 combinations AB and BA. If you were trying to get two combinations of four variables the options open up to 17 combinations AB, AC, AD, AE, BC, BE, BD, CE, CD, BA, CA, DA, EA, CB, EB, DB, EC. Why am I pointing this out? I want you to understand that $2,000 is made up of at a minimum 2 variables, but with the potential to have 7+ variables. The variables may include- Principal Payment, Interest Payment (Interest Rate), Homeowners Insurance, Property Taxes, Homeowners Association, Mortgage Insurance and/or secondary financing fee and with each variable they change based on the property. As you can see, the more variables the more combinations there will be, which in turn means the more volatility to what your estimated monthly payment will be.
2. In addition to all the variables that can alter the generic pre-approval, a good Listing Agent is going to want a Purchase Agreement to be submitted with a Property Specific Pre-Approval. They are aware of these variables and they want to be sure that the Purchase Agreement that is being submitted is vetted and fully backed by strong finances.
3. My third reason for making sure you have a pre-approval that is property specific is to protect your emotions and expectations. If you as the buyer assume you can afford and be approved for a $250,000 home regardless of the property variables then you could be setting yourself up for an emotional rollercoaster. I recommend my borrowers send me the top properties they are interested in so I can run the numbers to confirm they can be approved for the property. I will also provide an estimated monthly payment and how they will need to structure their offer in order to be awarded an approval. The borrowers then have the ability to discuss this with their Real Estate Advisor prior to falling in love with the property.
With the current state of the Housing Market in Minnesota and the COVID-19 regulations I believe it is in the best interest of all parties that you, the borrower, receive a thumbs up for approval on each and every property you are interested in submitting an offer on. This will show you are committed to the process and respect everyones time by not viewing a home you realistically can not submit a competitive offer on.
If you have questions on the Pre-Approval process please do not hesitate to reach out!
"What I can preapprove you for is different than what you can afford."