Pre-Approved But Can’t Afford It? Here’s Why

hey guys welcome back to another week of Mortgage Matters in Minutes again I'm your host Brent Rasmussen and today's Mortgage Matters in Minutes we're going to talk about pre-approvals but most specifically monthly payments again I'm owner of Mortgage Specialists in Lending over 25 years and today I've seen thousands and thousands of pre-approvals and suggestions to clients of what they should look at for home prices and payments and running numbers in regards to that so what we're going to chat about today is kind of some of the errors maybe people might look at in a pre-approval or what they are doing for a pre-approval so first what is a pre-approval and that word gets thrown out a lot all it really means is that a professional has looked at your credit your income and your assets and decided if you qualify by the loan guidelines that exist and I will tell you mortgage professionals generally look towards Fannie Mae Freddie Mac FHA and VA for the most guidelines to get you qualified so before you put an offer in especially in tight markets you definitely need a pre-approval letter and so that's what you're seeking but when clients contact us and call us a lot of times they want to know what the maximum amount is for the pre-approval because it makes them feel good but if we share with them what the maximum amount is sometimes psychologically in their mind they feel that's what they can afford and we want to put the budget for their monthly payments into the budget of their real income and their real lives their net income because when we look at income for mortgage loans we look at gross income which is the number before taxes so a lot of times when we grant a pre-approval for clients they want the highest number but generally speaking that's not always practical because I've seen clients that have nearly no bills get qualified at two or three times the amount that they want for a home and it makes no sense to go put an offer on a three 400 000 house if you show them your pre-approved to a million the seller kind of has questions there of why are you looking at doing something like this or vice versa so that's the first kind of uh trick that we see individuals fall into is getting that number and getting a full sense of hope that that's how much they can afford because really we're wanting to talk with them and saying hey what do you feel your budget is for your monthly payment and how does that look in qualifying so in regards to a real pre-approval what we are looking at as lenders is how much of a payment you can afford I know when you want to work with Realtors and real estate agents and looking for homes they're all going to want to look at a price point the challenge that we run into as mortgage lenders is every house has different property taxes and different homeowners insurance whether you're on this side of town or that side of town or whatever the case may be we do know taxes run differently generally speaking here in Nebraska the newer the home the higher the taxes but the insurance is usually cheap around a newer home doesn't always go true when depends on the size of the home or the location or the ZIP code there's lots of factors that we fall into so when people call and say Hey I want a pre-approval for up to this dollar amount of a home we do list down the pre-approval but do know that the pre-approvals truly are based upon what the max monthly payment is and that's what we call debt to income ratio we look at your income we look at your debts and we divide those two so generally speaking all of your debts need to be within that 40 to 45 percent of your total gross income obviously there's certain instances on certain loans you can go higher than that and there's certain instances where you can go lower than that so a lot of people call us and say I make this much money how much can I afford and I'll say well it depends how much debt you have and that's why when we do a pre-approval we have you fill out an application so we can obtain your credit report whether it's a soft credit check or a hard credit check to be able to look at the payments that you have and make sure you qualify for what it is that you're looking for and I can tell you right now with interest rates being higher and the home values being higher people are looking at home prices but wanting a significantly lower payment which puts them into a significantly lower bracket of homes and that's been challenging for many to undertake because we've seen inflation big in regards to interest rates and home values as well so really what's it come down to when we're looking at a pre-approval in simple terms it comes down to how much of a home payment can you afford with your current income and your current debt so as mortgage lenders we have to guesstimate what a payment looks like on a 300 000 house on a 400 000 house on a 500 000 house we have to guess insurance we have to guess taxes some mortgage lenders are going to get more accurate some are going to be a little bit more inaccurate and giving you some false numbers so that's what makes it very challenging when you may go and get two or three pre-approvals is trying to compare apples to apples and numbers numbers because all of us might be plugging in a little different formula I can tell you at mortgage Specialists we review what we put out on a daily basis and also look at what we quoted compared to what happens at closing and if those numbers are differ we change as we go as the market is Ever Changing because the best thing we can do for you is give you accurate numbers to go off of if you're not getting accurate numbers that doesn't help you it doesn't help me because you're discouraged at the end of the day thinking that you can afford a certain home after you move in you have more debts than you want so when you're looking at getting a pre-approval look at the pre-approval if you are a realtor or if you are a consumer look at the max payment that an individual can qualify for that's what your pre-approval is based upon we're not going to tell you for sure you can afford every 300 000 house in the market because there might be one out there that has absorbent taxes and insurance for some reason or there might be a house that's a 400 000 house that has very cheap insurance and cheap taxes so what we pre-approve individuals on is the max mortgage payment and that's going to be listed in your pre-approval if you get a chance when you receive your pre-approval read through it see if it makes sense to you see if the numbers are accurate and that's what's going to be given to the seller's agent when you submit your offer so I hope you learn a little bit more in depth about a specific pre-approval because that's what really matters in regards to real estate and for you setting your budget moving forward uh for your life and living in your home so if you have any questions for us or just a phone call away at 402-991-5153 you can check us out on our website at mtg-specialists.com and we'll love to hear from you and hopefully we'll see you all next week same time same place [Music] mortgage specialist driven trusted reliable