At what point during my home search should I apply for a mortgage approval?

The answer is quite simple – AS SOON AS POSSIBLE!

There are number of good reasons to apply for what is known as a pre-approval at the very beginning of your home shopping process.

First of all, if you don’t know how much of a mortgage you will be approved for, you really have no valid way of deciding what price range to look in. In other words, you may really like a certain community where the homes run, let’s say, between $350,000 and $400,000. If you can contribute $50,000 as a down payment and you can obtain a $250,000 mortgage you are probably not going to be able to purchase in that community. If you’re really determined to move there, then the sooner you know about the difference between what you have and what you need, the better.

Secondly, if you do find a house that you want to make an offer on, your offer will be a much “stronger” offer if you have a pre-approval letter than if you don’t. In the event that you are competing with another buyer for a specific property, your offer, with a pre-approval will likely be taken more seriously. It could even convince the seller to take less money.

Think about it. If you were selling your home, worth approximately $300,000 and you had two offers. One is for $294,000 from someone who has it in writing that they will be able to get a mortgage and close on your house. The other offer is for $297,000 but the buyer has nothing more to give you than his “word” that he has enough money and borrowing power. Which one would you take?

Let me also explain the difference between a pre-qualification and a pre-approval. A pre-qualification from a lender, could mean nothing more than a statement to the effect that “based on the information provided by the consumer” he would qualify for a mortgage of XX”. This is based, strictly on self-reported information by the consumer and carries very little or no weight when it comes time to enter a legitimate transaction.

A pre-approval is a formal letter from a lender that states that the lender has taken a credit application, run a credit check and that the buyer is approved for a mortgage of XX based on specific conditions. The conditions might be a loan-to-value ratio or a specific sized down payment, etc.

Most reputable lenders will not charge you anything for a pre-approval. There’s really no “downside” and plenty of “upside” to getting approved as early as possible in the game. When you do find a home you like, you will be glad you did.

I shouldn’t sell now – after all I’ll lose money since prices have dropped in the last year. RIGHT?

The math of whether you will make or lose money on the sale of your home is a simple calculation. Sometimes we complicate it with emotional issues that muddy the whole thing.

Here’s how it works. The price you paid for you home + any capital improvements you made equals your basis. Capital improvements are things like remodeling the kitchen, adding a deck, finishing a family room, etc. Take the basis and subtract it from the probable net selling price and you have the profit (or loss).

Hypothetical example:*

• You paid $200,000 for your home in 2001.
• You made $20,000 in improvements. Therefore your basis is $220,000.
• You are being offered $295,000 for your home.
• After Closing costs, Legal fees and Real Estate fees, you might net about $275,000.
• Subtract $220,000 from $275,000 and you will see that your profit is $55,000.

Here’s where it’s easy to muddy it up in your mind. 2 years ago you were told that you probably could get $340,000 for your house. (Net would likely be around $320). The temptation is there to subtract $275,000 from $340,000 and decide that you will be losing $65,000.

Here's what you have to keep in mind. What the value of your home would have been had you sold it last year or the year before is mathematically irrelevant.

The fact is – you didn’t sell it then – you are selling it now. The value of your home today, less what you paid is how to determine the profit.

There are certain situations where you might actually show a loss in these calculations but it's still based on facts - not feelings. If you purchased your home in the latter part of 2005 or early 2006, you may indeed have bought at the top of the appreciating market and you will see a loss when you do the calculations.

If this is your situation, you have to have a frank discussion with yourself and decide how important it is to move right now. If you do decide to move anyway, keep the good news in mind. While the real estate market is intensely local and things vary from community to community, it is entirely possible that whatever depreciation you are experiencing will also exist in the community where you want to buy.

*The numbers and calculations in this example are just to demonstrate a process and should not be construed to represent any predictions of profitability on any particular property.