Questions about pre-approval

[bpobst]

Background: Wife and I are saving to buy our first home. We are looking in an area that cuts out ~25 miles of driving combined per day. Rent is $1,200+ for us now. Home values are $125,000+ and we are fairly sure we can get a good one for $150,000 or so. Mortgage, taxes and insurance would be a good deal lower than our current rent. We both have stable jobs with family and friends here so no sign of moving out anytime soon. Current lease is up end of May. Combined income right at $100,000 and we both have bonus plans on top of that.

We don't have 20% (plus more for closing and stuff) at the moment but would by May. If we go to banks in February to get preapproved without 20% on hand how are we affected? Do we need the 20% before getting preapproved or will we be ok starting that process early and then continuing to save?

[lthenderson]

I'm guessing most banks will pre-approve you for a loan but at a lesser amount if you do it in February and don't have 20% down. They will probably not give you as good of interest rate as well. When you have the 20% down in May, the loan amount will probably go up and you will get a better interest rate.  A pre-approval for a loan isn't mandatory for buying a house and is more beneficial for you to know how much you can spend and get a loan from a bank. I've never had a deal go through simply because I was pre-approved but it might play apart if a seller is wanting to unload a house quickly and are willing to take less for someone who can most likely get the loan.

[opnfld]

Payments (and possibly interest rate) would be higher and include PMI.  But could provide you with interesting information about how much you can spend.

Provided you are approved, sellers will perceive your offer positively against those other offers lacking preapproval...which, as I understand it, is the sole purpose of preapproval in the first place.

[FerrumB5]

I got preapproved by my current lender on a earnest word that I would have 20%+ by the time we buy the house and start all the paperwork. All worked out just fine

[zephyr911]

Background: Wife and I are saving to buy our first home. We are looking in an area that cuts out ~25 miles of driving combined per day. Rent is $1,200+ for us now. Home values are $125,000+ and we are fairly sure we can get a good one for $150,000 or so. Mortgage, taxes and insurance would be a good deal lower than our current rent. We both have stable jobs with family and friends here so no sign of moving out anytime soon. Current lease is up end of May. Combined income right at $100,000 and we both have bonus plans on top of that.

We don't have 20% (plus more for closing and stuff) at the moment but would by May. If we go to banks in February to get preapproved without 20% on hand how are we affected? Do we need the 20% before getting preapproved or will we be ok starting that process early and then continuing to save?

You'll get a lot of good guesses here, but the most important thing is to run the numbers on what they actually offer you.

We bought our current place a year ago, and the way I chose to set up the analysis was to get estimates for all the down payment options, and then calculate the return on incrementally higher down payments so I could compare them to our investment options. Our house was $122k, and the smallest DP option was 3.5% (FHA), with a ridiculous $200+ PMI that would never go away no matter how much we paid down the loan. Bumping it up to 10% (another $7930) gave us better rate options and only $32/mo in PMI, for an annual savings of almost $2k - nearly 25% return. Going to 20%, or $24400, would have produced about a 6% return on the additional $12200, which we declined to do (assuming higher market returns would offset the interest). We left the rest of our funds invested, and have been paying slightly extra to reach 80% LTV at the 2-yr point and lose the PMI. Beyond that point, any additional principal payments would return less than 3%, factoring in tax deductions, or effectively 0% after inflation.

Your details will differ; the key is to understand this is a diminishing-returns situation and locate your own personal sweet spot.

[bpobst]

Thanks, we'll just start exploring in February and make decisions from there. Worst case we go month to month on our apartment to get us a bit more time.