Prequalified vs Pre-approved
The first step in the home purchasing process is to meet with a lender to get pre-qualified, and then pre-approved, to buy. Pre-qualification means that the lender has taken a snapshot of your finances so you have an idea of how much of a mortgage you may qualify for. It can be helpful if you are in the very beginning phase of thinking of buying a home.
A pre-approval is the next step and necessary to move forward in the purchasing process. Your lender will collect all of your financial information, including credit reports, pay stubs, bank statements, salary, assets, and obligations. Pre-approval means that your loan is contingent only on the appraisal of your new home.
When making an offer on a home, sellers will prefer a pre-approval letter from your lender as it demonstrates that you are prepared and have the financial ability to purchase their home.
You’ve most likely heard the rule: Save for a 20-percent down payment before you buy a home. The logic behind saving 20 percent is solid, as it shows that you have the financial discipline and stability to save for a long-term goal. It also helps you get favorable rates from lenders.
But there can actually be financial benefits to putting down a small down payment—as low as three percent—rather than parting with so much cash up front, even if you have the money available.
The downsides of a small down payment are pretty well known. You’ll have to pay Private Mortgage Insurance for years, and the lower your down payment, the more you’ll pay. You’ll also be offered a lesser loan amount than borrowers who have a 20-percent down payment, which will eliminate some homes from your search.
The national average for home appreciation is about five percent. The appreciation is independent from your home payment, so whether you put down 20 percent or three percent, the increase in equity is the same. If you’re looking at your home as an investment, putting down a smaller amount can lead to a higher return on investment, while also leaving more of your savings free for home repairs, upgrades, or other investment opportunities.
Of course, your home payment options aren’t binary. Most borrowers can find some common ground between the security of a traditional 20 percent and an investment-focused, small down payment.