Quick Note And How We Help

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Quick note before we get started. If you're thinking about buying your first home and you want help figuring out your numbers, your options, or what the next step should be, my team and I would love to help. This podcast is completely free and the way you can support the show is simply by giving us the opportunity to help you when you're ready to buy. You can reach out to us anytime and we'll help you figure out what makes the most sense for your situation. Alright, let's get into the episode.

What Does Pre-Approved Mean?

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You got pre-approved for $700,000. Great. But here's a question most home buyers never ask. What does pre-approved actually mean? Did someone actually review your income? Did they look at your bank statements? Did they verify your down payment? Did they review your tax returns if you're self-employed? Or did you fill out a five-minute form online and a computer generated a letter? Because those are two very different things. And when you're about to make one of the largest purchases of your life, you need to know which one you have. Hey, welcome back to the First Time Home Buyer Pros podcast. I'm Dat, and today we're breaking down something you're going to hear almost immediately when you start buying a home. A pre-qualification and a pre-approval. We're going to talk about what they actually mean, what a lender is looking at, what documents you're probably going to need, and why two buyers can have a pre-approval letter, but one may be significantly more prepared than the other. Let's get into it.

Pre-Qualification As A Starting Point

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Let's start with pre-qualification. Think of a pre-qualification as a first conversation. You tell a lender I make about $100,000 a year. I have about $50,000 saved, I think. My credit is around $720, and I have a $500 car payment. And based on the information you've provided, the lender gives you an idea of what you may qualify for. That's useful, especially you're six months or a year from buying and you're just trying to understand where you stand. But here's the important part. A pre-qualification may be based heavily on information you provided that hasn't been fully verified yet. That's why I don't want you treating a pre-qualification like a guarantee. It's just a starting point, not the finish line.

What A Real Pre-Approval Reviews

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A pre-approval should go deeper. Now we're actually looking underneath the hood. We're reviewing things like your income, your employment history, your credit, monthly debts, your assets, your down payment, potential closing costs, and depending on your situation, tax returns, W-2s, pay stubs, bank statements, business income, bonus income, commission income, rental properties, or other documentation. The lender is trying to answer a much more important question than can you buy a house? The real question is, can we document this loan well enough that it has a reasonable path to actually close? That's what matters. This is probably the most important part of this episode. Not every lender uses the words pre-qualification and pre-approval exactly the same way. So don't obsess what the letter is called. Ask what actually happened behind the scenes. Because imagine two buyers. Buyer number one fills out an online application, they say they make $150,000, they estimate their assets, their credit gets checked, and 10 minutes later they receive a pre-approval letter. Buyer number two also makes $150,000, but their lender collects the pay stubs, review the bank statements, look at the tech, looks at the employment history, verifies the down payment, reviews the credit, checks the debts, and identifies potential issues before that buyer ever writes an offer. Both buyers might walk into the open house carrying something called a pre-approval letter, but those are not necessarily the same level of preparation. And that's why I tell buyers, don't just ask, Am I pre-approved? Ask, what have you actually reviewed?

Income Credit And DTI Basics

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Most mortgage qualification really comes down to a few major categories. Let's make these simple. Income. First, can we document enough qualifying income? And notice I said qualifying income. That's different from simply asking, how much money do you make? If you're a salaried employee, this might be relatively straightforward, but let's just say you're self-employed or you receive commission, overtime, bonuses, RSUs, multiple jobs, or you're a business owner with a lot of tax write-offs. Now it gets more complicated, right? You could make a lot of money in real life and still have difficulty documenting enough qualifying income for traditional mortgage. That's why reviewing the documentation early matters. Next is credit. Your credit can affect what loan programs are available to you, your interest rate, your mortgage insurance, and sometimes how much flexibility we have with the overall loan. But don't automatically assume my credit isn't perfect, so I can't buy. I've seen buyers wait for no reason because they're trying to hit some magical credit score they read about online or Chat GPT. Your entire loan profile matters. Talk to somebody who can actually look at the whole picture, like us. Then we look at your monthly obligations, car payments, student loans, credit cards, personal loans, other mortgages, child support, or other qualifying obligations when applicable. We compare those debts with your qualifying income. This is where you'll hear the term debts to income ratio or DTI. But here's something I want first-time homebuyers to understand. Just because the mortgage guidelines allow you to qualify for a certain payment doesn't mean that's the payment you should choose. There's a difference between what can I qualify for and what payment am I actually comfortable living with every month? Those are two different conversations, and a good lender should have both of them with you.

Down Payment Closing Costs Reserves

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The next part is your money. Where is your down payment coming from? How much do you have for closing costs? Do you need reserves? Are you receiving gift funds from family? Are you using a 401k? Are you selling investments? Because one of the biggest misconceptions first-time buyers have is I saved my down payment, so I'm ready. But your down payment isn't necessarily your entire cash requirement. Depending on the transaction, there can also be closing costs, prepaid property taxes, homeowners insurance, and other expenses. And personally, I don't like seeing somebody drain every dollar they have just to buy the house. You still have to have some cushion after. Here's another major

The House Still Must Qualify

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misconception. You can be completely pre-approved as a borrower and still not have the final loan approved. Why? Because we haven't approved the house yet. Once you're in contract, the property itself becomes part of the equation. Depending on the loan, we may need an appraisal, title, insurance, HOA documentation, condo approval, property condition, and other items. So when your lender says you're pre-approved, they are not saying your future loan is guaranteed. They're saying based on what we currently know about you and the assumptions we're using, we have a path forward. The property still has to make sense too. This is why I don't want you quitting your job, financing a new car, opening up a bunch of credit cards, or moving $80,000 around without telling your lender. Just because you already have your pre-approval letter, your financial situation still matters all the way through closing. If something materially changes, you have to tell your lender. I'd rather that you have a conversation before you do something than find out about it three days before closing.

Stop Chasing The Max Price

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Here's another mistake buyers make. They ask, what's the absolute maximum house I can buy? I think that's the wrong question. If I tell you that technically you can qualify for an $850,000 purchase, that doesn't automatically mean you should shop at $850,000. I want to know what monthly payment actually feels comfortable. What do your other expenses look like? Do you travel? Have kids? Are you planning to have kids? Do you want to continue investing? Own a business? How much money do you want left over every month? Because your mortgage company doesn't live your life. You do. So a good pre-approval, it shouldn't just give you a maximum purchase price. It should help you understand your options. Maybe look at $700,000 or $750,000. What does each one look like? What happens if you put more down, less down, ask for seller credits, choose a different loan program. That's the part that actually helps you make a decision.

Why Agents And Sellers Care

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And this is also why your real estate agent wants you properly pre-approved before you're seriously looking at houses. It's not because they're trying to make the process difficult. It's actually the opposite. Imagine spending three weekends looking at houses, finally finding the one you love, and then discovering you can't actually finance it. Or worse, you write the offer, the seller accepts it, and you're emotionally invested, and now everybody is scrambling to solve a financing problem that could have been discovered two weeks earlier. A good agent doesn't want that for you, and neither does a good lender. The pre-approval gives the agent information they need to help you shop intelligently. And when you finally find the right property, the lender and agent can work together to structure the strongest offer possible. There is another benefit. When you make an offer, the seller doesn't know you, they don't know your finances, they don't know whether you're actually capable of closing. Your pre-approval helps your real estate agent communicate this buyer is pre-approved. And when I'm working with one of our buyers, if the listing agent has questions about financing, I want them to call us because sometimes the strength of your offer isn't the only number written on the purchase contract. It's also how confident the seller feels that your transaction is going to close.

Questions To Ask Your Lender

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So if somebody tells you you're pre-approved, here are the questions I want you to ask. Have you reviewed my income documents? Have you reviewed my assets? Have you reviewed my credit and monthly debts? Are there any condition or issues that concern you? What payment would you recommend I stay around? How much money should I expect to need at closing? And one of my favorites, is there anything about my file that could become a problem later? That's a great question. Because I don't want surprises after you're an escrow. I want to find the surprises now. And here's one

Start Early And Build A Plan

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last thing. Don't be afraid to talk to a lender because you think you're not ready. You don't have to be buying next weekend. Sometimes the best pre-approval conversation happens six months before someone buys. Maybe we discover you need to improve your credit, save another $10,000, pay down one account, document income differently, or simply wait a few months. That's okay, because now we have a plan. I'll much rather tell somebody you're not ready today, but here's exactly what we need to do, than have them guess for another year based off of TikTok, Reddit, Google, or AI. So let's bring all this together.

Recap And Reach Out

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A pre-qualification can give you an initial idea of what you may be able to afford. A pre-approval should take a deeper look at your financial situation, but don't get overly caught up in the terminology because lenders don't all use those words the same way. What matters is how thorough your file has been reviewed before you start seriously shopping. You want to understand your financing, your estimated payment, your cash needed to close, and any potential problems that could come up later. Because the goal isn't simply to get a piece of paper saying pre-approved. The goal is to make sure that when you find the right house, you're actually ready to buy it. If you're thinking about buying your first home and you want us to take a look at your situation, reach out to our team. We'll help you understand where you stand, what options are available, and what the next steps should be. And if you're not ready yet, that's completely fine. We'll help you build the plan. I'll see you in the next episode.