Will Applying for a Mortgage Cause Problems?

[Gilberto de Piento]

I'm interested in buying a house at some point. I will need a mortgage. I'm thinking about applying for a mortgage online to find out what the process is like and to see if I am approved and for how much. Will applying for a mortgage and not using it cause any problems?

[chicago81]

They'll do a "hard pull" credit inquiry which will show up on your credit reports that you have applied for credit. This has a very minor negative impact on your credit score for a short period of time (6 months to 2 years or so) I believe.

[suomalainen]

The process is boring. Gather a ton of paperwork and fill out an application. They just look at credit score, income, assets and liabilities and will have a formula such that x% (I think it's 33, but not positive) of your income can go to cover housing costs (mortgage, taxes, insurance) and y% (40 or 50 maybe?) on debt payments as a whole, inclusive of housing costs.

They will ask you how much you want and will either approve that amount or a lesser amount. I don't think it's worth the "hard pull" unless you're actually in the market for a house since you essentially don't get any useful information out of the process anyway. If you're not sure whether you qualify for a mortgage, you can maybe just order a credit score. But you can estimate your score - if you've never been late on debt payments and you don't have too much debt, you have a fine score. Income vs liabilities will be the bigger factor.

[Jason]

I just re-fi'ed and it was like a financial cavity search, minus the rubber glove and lube. So I don't see why you would volunteer for that until you actually need to.

There are enough "how much can you afford" calculators and on-line mortgage simulators where you don't have to go through the approval process. I find them to be generally reflective of what the banks will offer.

Just remember its the payment you are comfortable with. Most likely as an ERE person, you are going to secure a mortgage less than what you are ultimately approved for or what the calculator says you will be offered..

[El Duderino]

These underwriters don't care how much net worth you have, it's all about debt burden to verified, steady income. IMO, a typical ERE'r will make their decision to finance based on term period and prevailing interest rates.

[jennypenny]

I've heard almost everyone is qualifying for mortgages right now, so it might not be indicative of what you'd be able to borrow should the market tighten up.

You can always get a mortgage if you put 20% down and the payment/taxes aren't more than 40% of your monthly income. You can usually get one if you put 10% down. You can probably get one with as little as 3% down if the house is a good investment. Last time I checked, if you put 25% down they didn't bother with income verification and with 50% down it was a 'no paperwork' deal.

I agree with others, skip the unpleasantness and wait until you need one.

[Gilberto de Piento]

I think I will hold off on this for now. Thank you for the information.

[SavingWithBabies]

I prequalified with my bank. I don't know if I'll actually use them for a mortgage but it was fairly painless but then again we have a low debt to income ratio as mentioned above. If you're curious, I'd suggest doing it now so that if you do come across a property to buy, it's easy to get that preapproval activated again. The preapprovals, at least with my bank, expire after a period of maybe 3 months. It was easy to call in and get it renewed (another hard pull I think) and modify the maximum loan amount.

[IlliniDave]

Before I bought my cabin I got a pre-approval (more for neotiating power than for wondering how much I could borrow--I could have written a check for the place had I wanted to, had zero debt, and a fairly high income). Like someone mentioned you'll get an inquiry on your credit record which could make your credit score temporarily drop a couple points, but not much. In my case I also got charged 10 or 15 bucks for the cost of the credit report (would have been refunded if I'd followed through with a mortgage from that lender--I chose another).

However, I would be hesitant to do it now because all it would do is refresh your info in the credit agency data banks which, as we've seen recently aren't all that secure, and for the risk you're getting relatively little reward. If it were me I wouldn't do it until I was prepared to make an offer.

A mortgage calculator and a little research will allow you to estimate the P+I payments for a number of loan amounts, and more research would could probably tell you what lenders typically stomach for total dept service payment-to-income levels. I suspect it would add up to more than you are comfortable borrowing/paying if you're at all financially conservative. A rule of thumb I like is your mortgage PI should be about 25% of take home. Any bank would lend you that if your credit is not trashed , you're not swamped in debt, and the property appraises at or above the purchase price. An old rule of thumb I recall from before I bought my first house is that banks like your total monthly debt payment including the mortgage to be 50% or less of your monthly income. Depending on your debt and credit history, it would probably work out to 3-4x your gross annual income.

[Gilberto de Piento]

A rule of thumb I like is your mortgage PI should be about 25% of take home.

I'd like to pay no more than $200,000 and take on a mortgage of no more than $150,000. That would give me a monthly payment of about $1000, about 25% of my income. Obviously I'd like to pay less but it's probably not realistic.

[Riggerjack]

Go to Zillow, click mortgages. There is a simple tool for entering nonpersonal information, and then they pull quotes.

I recommend this for a few reasons. You can play with all the inputs, including credit score, to see how that affects the numbers. And they are pulling real-time quotes from lender algorithms. No playing with old rates

How real are the quotes? Well that varies by lender, and since they are competing for placement on the results list, expect some optimisation from the lenders. The next step is to get a "good faith estimate" from the lenders you choose, and compare them line by line. From this, choose a lender to give you a pre-qualification letter. You want this to open an account, and have a mortgage whore's direct number.

When you go home shopping, you want to have all of this done. As a seller, I would look askance at an offer without a pre-qualification letter. But as importantly, the pre-qualification letter is a negotiation tool.

When I submit an offer, it is accompanied by a fresh pre-qualification letter that matches my offer. I do this by making up the offer paperwork, and contacting my mortgage whore for a matching letter. Then, if they think of counteroffering, they have to wonder if they are pricing me out of the sale. Obviously, this has other complications in a hot market.

Last piece of advice. Real estate is the place everyone goes after they have completely failed at everything else. Competence or professionalism are absolutely optional. Everyone gets paid a commission when a deal goes through, nobody gets paid if it doesn't. Everyone involved has different motivations, but the ONLY party looking out for your interests is you.