Mortgages
Is lender always right when prequalifying your home finance and determining affordability?
By
Sep 19, 2005, 09:34

Most supposed experts in home buying and home finance give this advice: “Before you even begin to shop for a home, meet with a lender to get pre-qualified for a loan. With pre-qualification, you’ll learn exactly how much home you can afford, and you won’t waste time looking at homes outside of your price range.”

Superficially, this advice makes sense. Why try to order filet mignon on a hamburger budget? Nevertheless, realize that this advice did not develop to chiefly promote your needs; it secured its place in mortgage lore to primarily advance the interests of real estate agents and mortgage lenders.

In theory, pre-qualifying (pre-approval) for a loan doesn’t just promote the interests of lenders and realty agents. Looking at homes you can’t afford (unless you’re just curious about how the other half lives), wastes your time and psyches you up for a big letdown. But here’s the rub: Home buying and home financing weigh far too heavily in your overall financial and lifestyle planning to shortchanged by a 10-minute computer exercise.

In point of fact, no simple qualifying formula can even begin to accurately tell you “how much home you can afford,” or more importantly, “how much home you should buy.” Plugging your current credit and finances into a pre-qualify or pre-approval computer program pushes aside the real questions you should ask yourself. Such formulaic analyses ignore critical issues such as these:

Although a relative few highly professional loan reps will help you accurately address important financial and life-planning issues such as those enumerated above, the great majority will not. The great majority lacks the time, the intellectual acumen, and the will to guide you to your best decision. Indeed, never forget that loan reaps, like ca sales reaps, want you to buy the products they are selling. Would you expect unbiased auto advice from the sales agent at he Buick dealer? No? Then why would you expect unbiased advice form the loan rep at the Old Faithful Mortgage Company?

With that said, we return to the theme of Mortgage Secrets: Foremost, take measure of yourself. Learn your choices. Arrange your property purchase and financing decisions to advance your overall life and financial goals. The great majority of borrowers err because they attempt to minimize the monthly payment rather than maximize their wealth.

Most mortgage lenders emphasize where you stand financially today, but your focus must extend over a longer horizon. Most lenders emphasize your ability and willingness to pay your mortgage as evinced only by their approval formula. You must not accept this narrow view. You must decide for yourself if you should buy more (or les) property than the standard formulas suggest, and correspondingly, if you should borrow more (or less) than this lender’s guidelines recommend.

The folks who urge you to get pre-qualified for a loan rarely mentions that potential borrowers may choose from dozens (actually hundreds) of home products. Each of these products may vary with respect to interest rate, down payment, credit standards, monthly payment amounts, mortgage insurance premiums, qualifying ratios, closing costs, eligible types of properties, occupancy standards, and may other terms and conditions. Any of these differences can affect your loan affordability or approval.

Just look at the 60 financing programs and affordability techniques listed below. Although it’s not complete by a long short, a brief reading does illustrate my point: No loan rep (or anyone else) can tell you exactly how much loan you can afford unless they worked through all of these possibilities (singularly or in combination).