Pre-qualification Gives Homebuyers Bargaining Power
Pre-qualification is an initial evaluation made by financial institutions to help them estimate the creditworthiness of a potential applicant. This process helps banks to determine whether the borrower will be able to meet his monthly payments. Thus they can estimate the amount applicants can reasonably borrow and repay.
Factors Banks Consider
Financial institutions look at factors such as the applicant’s income level and expenses. Being an initial assessment, the borrower’s credit score or report is not taken into account. Banks consider factors such as sources of income, total income, credit limit on each card, total debt and payments, collateral or real estate security, and number of dependants. The easiest way to calculate your loan pre-qualification is to use an online calculator. You will need to enter the loan term, interest rate, and the above data. Financial institutions assess the different factors to determine the loan amount the borrower is able to afford. The more sources of income the applicant has, the higher the chances of getting approved for a mortgage loan. Your total credit limit is another factor (this is different from your outstanding balance). Financial institutions also look at the applicant’s after-tax income from different sources. The expenses include debt such as credit card balances and existing loans. Using an online calculator will help you to calculate your monthly payment by just plugging in the numbers. For example, if you apply for a $300,000 loan with a term of 20 years and interest rate of 7.5 percent, your monthly payment will equal $2,417, provided that your real estate security is $230,000, your annual income is $60,000 and your loan payment and credit card limit are $2,000 and $15,000 respectively. In this example, the applicant has 2 dependents and 3 sources of income. The borrower is not a likely candidate for several reasons. One is the high loan amount to security ratio ($300,000/$230,000) which is more than 130 percent. Applications for loan amounts with a ratio that exceeds 95 percent are usually declined. Your application is likely to get approved if your real estate security is $400,000 because your ratio is 75 percent. Your payment will not change, however. It is up to the loan officer to assess all factors.
Pre-qualification vs. Pre-approval
There is a difference between pre-approval and pre-qualification, the former being the extension of the latter. With pre-qualification, applicants supply information online or by phone. The goal is to help the bank to assess your financial situation. Pre-approval is the next step. The applicant is asked to fill in a mortgage application and supply the required documentation. The financial institution runs a credit check and looks at the financial background of the borrower. This is the stage during which the financial institution determines the loan amount for which the borrower is approved. This is beneficial for borrowers because it allows them to look for properties that are within this price range. The applicant may also discuss the interest rate to get a better idea of the monthly payments.
Advantages for Applicants
Pre-qualification and pre-approval are beneficial not only because the borrower knows the loan amount in advance. Another advantage is that this will allow you to fix any issues with your credit if necessary. Then many sellers accept price offers only if you enclose a pre-qualification or pre-approval letter. This is a good enough reason to take their house off the market. It proves that you are a serious buyer. Such buyers have advantage over others who haven’t been preapproved. Moreover, this gives them leverage and bargaining power and makes it easier to negotiate with the seller. It saves homebuyers money and time. There is nothing worse than spending many hours looking at real estate properties and finding the ideal place for you only to find out that you will not get approved for a loan. Pre-qualification helps borrower’s with their house hunt. In some cases, the borrower is offered a loan amount that is larger than the required. The applicant may want to discuss this with the financial institution so that the amount is scaled back.
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