Phil Pless, CRB, CRS's Blog
If you’re ready to buy a home, you probably have done a lot of research. One thing is sure: You know you need to get pre-approved for a mortgage. It’s perhaps the most critical step in the process of buying a home for a variety of reasons. There’s down payments and debt-to-income ratios, and other financial issues to worry about. You need to know what type of mortgage you should get. To help you understand what kind of mortgage you need, you should get pre-approved.
Understand The Pre-Approval Process
There are many misconceptions about pre-approvals. First, buyers need to understand that there is a difference between a pre-qualification and a pre-approval. A pre-qualification merely scrapes the surface of your financial state, while a pre-approval goes through everything a mortgage company will need to grant you a loan. You may be pre-qualified for a much higher amount than you can actually afford, for example.
A pre-approval is a lender’s written commitment to a borrower. The approval states that the lender is willing to lend a certain amount of money for a home. The lender obtains the following from the buyer:
- Employment history
- Credit report
- Tax returns
- Bank statements
The time and effort that it takes to get a pre-approval is worth it because everything will be ready for the lender to grant the mortgage once an offer is made on a home. It also gives the buyer an upper hand in finding the home of their dreams. Many sellers require a pre-approval with an offer.
When To Get A Pre Approval
As soon as you know you’re serious about buying a home and are ready to start the house hunt, you should get pre-approved. Pre-approvals do expire after a certain amount of time, but lenders can renew them with proper notice.
The Importance Of The Pre-Approval
Many buyers feel that they can skip the pre-approval process altogether. It has many benefits. Besides giving you a better look at your finances and how much house you can afford, pre-approvals can:
- Give you the insight to correct your credit score and help you correct credit problems
- Help to avoid disappointment when you find a home you love
- Allow first-time buyers to see all of the costs involved in buying a home
A pre-approval is a handy thing to have, and it’s not just because the experts say it’s essential. Getting pre-approved for a mortgage can help you to be more on top of your finances going into one of the most significant purchases you'll ever make in your life.
Deciding not to pay off ahead on your mortgage can be a decision made because you want to divert your cash to another investment. If you have an investment that is certain to yield interest or because you have a certain way you have planned your finances, paying the full mortgage earlier than due has no place on that list.
Deciding to pay off or not to pay off early most times is an option because of inheritance proceeds, or life insurance proceeds. If you are in a fix about this decision, here are the reasons why you should not pay off your mortgage early.
Eliminates tax benefits
Owing on a mortgage with interest reduces your tax liability. Deciding to settle your mortgage payment will eliminate all tax deduction benefits. Taking advantage of these tax benefits as a borrower reduces your income on which tax is due and sometimes increases funds available for use.Higher return on investment If there is a guarantee that an investment will pay high interest, why would you want to tie down your money on a mortgage payment? Having other investments aside from your mortgage property is a smart decision to make, as multiple investments may yield more profit and, are a guaranteed way of having multiple streams of income.
For liquidity purposes
Some individuals always like access to cash at any time. For such people, the decision to pay off a mortgage early would only come after they have made all other payments including other investments. For people who value liquidity over an investment, it’s advisable to keep the mortgage as that might be a better option for giving them more cash on hand.
You might have other debts
In this present generation, there is a lot of other debt to worry about aside from your mortgage. These other debts are some of which you incur from your daily living expenses and are more pressing to settle than your mortgage. Debts like your car loan typically have a higher interest rate than your mortgage and are not deductible from income tax. School loans, credit cards, home equity credit are all debts that should be paid off first before you consider early mortgage payment.
When you do not have an emergency fund
Having an emergency fund that can cover you for at least 12 months is crucial if you are considering paying off your mortgage. You do not want to put all your money on your property and later begin to ask for a home equity loan when unforeseen situations arise.
Paying off your mortgage is a reasonable decision to make, but do not do it in such a way that leaves you financially crippled.
Talk to your financial advisor about what works best in your situation for your financial future.