Prequalifying for a mortgage loan is an integral component of the home buying process, enabling you to narrow your home search while signaling to sellers that you’re serious about buying their house.
Applying for credit requires conducting a hard inquiry on your file, which could adversely impact your score; however, many lenders offer the option of restricting their inquiries to one at a time.
1. Know Your Limits
Prequalifying for a home loan requires going beyond simply providing basic financial details to a lender. They’ll take an in-depth look at your credit score, debt load, income and assets in order to provide an estimate of how much money can be borrowed.
Preapproval can give you an advantage when searching for homes, as it narrows your search to those within your price range. But keep in mind that lender approval is never certain: Your credit scores and debt-to-income ratio could change between when you preapproved and when you find your perfect house; which could render you no longer eligible for mortgage financing or cause you to miss out on getting better mortgage rates.
If your loan application is turned down, lenders usually provide an explanation as to why. This may help identify areas in need of improvement such as paying down credit cards to improve debt-to-income ratio or correcting inaccuracies on your credit report.
Lenders will also require proof of consistent income, which may present challenges for freelancers or those receiving dividends and interest instead of paychecks. To make this process as painless as possible, save all pay stubs and tax returns from the past two years as well as having documents such as utility bills and car registration ready.
Mortgage preapprovals don’t last forever, so it is wise to apply for one as soon as you begin thinking of buying a home. Doing this will enable you to quickly identify any credit problems or savings gaps so they can be corrected before becoming issues during the application process for a mortgage loan.
Preapproval provides you with an estimated loan amount and estimated interest rate, helping guide your home search. Once you find an ideal house and submit all necessary documentation – such as an appraisal report – the full mortgage underwriting process will begin and all necessary documentation submitted, including an appraisal will need to be approved before underwriting will begin in earnest.
2. Know Your Options
Prequalify with multiple lenders as each has different rules and interest rate options that could save you thousands over the life of your mortgage loan. Do your research carefully as each can offer unique offers to save thousands in interest over time.
Once you receive your mortgage preapproval, it’s important to remember that this doesn’t obligate you in any way. Instead, it gives an accurate picture of what kind of home purchase fits within your budget and can comfortably afford.
A lender’s process for approving you for a loan involves several considerations, including your bank and investment accounts, assets and debts as well as current income. A credit check may cause temporary damage to your score but should only have minimal effect.
If your credit has taken a hit, it may be beneficial to take some time before applying for a mortgage to rectify your finances and restore order to your finances. This might involve disputing incorrect information on your credit report or paying down debt in order to improve your debt-to-income ratio.
Try not to make any major credit purchases or switch jobs during this time, as doing so could throw off the calculations used to establish your debt-to-income ratio and delay underwriting processes.
Many lenders utilize the 28/36 rule to help borrowers determine what monthly mortgage payment they can afford. This means your mortgage shouldn’t exceed 28% of your gross, pretax monthly income while total debt payments (such as credit card and auto loans ) shouldn’t surpass 36% of total income.
Acquiring a mortgage preapproval can be an invaluable resource for homebuyers, and should be completed at the very beginning of their search process. Not only will it give an idea of your budget and what’s within reach, it will also give an edge when negotiating with sellers and showing property at showings – by showing up with a letter verifying preapproval, it demonstrates your seriousness as an applicant and demonstrate your ability to finance any purchase made by showing it at each showing.
3. Make Sure You’re Ready
Home loans involve many moving pieces that could alter their process. Lenders will review your credit report, verify your income and employment, look at your debt-to-income ratio to ensure there is enough available for mortgage payments as well as check the property to ensure its fair market value and title history are clean. If there are financial roadblocks preventing preapproval then immediate steps must be taken – raising credit score; eliminating debt; or finding ways of increasing income are some methods you could pursue to try to ensure smooth sailing during preapproval process.
Preapproved home loans provide you with an advantage by giving you insight into your creditworthiness and budget limits before starting to look for properties, which could save money in the long run. Furthermore, being preapproved shows sellers that you’re serious buyer who’s prepared to take out a mortgage.
Within three days of receiving your mortgage application, lenders will provide you with a “loan estimate,” outlining your preapproved amount and other pertinent loan details – maximum loan amounts, terms, interest rates, fees, estimated monthly payments and costs as well as property taxes/homeowner’s insurance/closing costs associated with purchasing new home(s). This document allows you to shop around confidently knowing what to expect as you compare prices and offers within your price range.
Keep in mind that mortgage preapprovals have an expiration date, so don’t put off purchasing your dream home for too long. Your finances could change and threaten your eligibility status if you do; major life changes like changing jobs or taking on additional debt after receiving your preapproval could require underwriters to reevaluate it which could delay closing on a home loan loan. To protect against potential pitfalls it’s wise to get preapproved by more than one lender as this gives you a better opportunity to compare fee structures, closing timelines and customer service quality before committing.
4. Find a Lender
Prequalifying for a home loan takes much of the work out of house-hunting. This process includes filling out a full mortgage application, verifying financial documents and agreeing to a credit check – yet even after getting preapproved you shouldn’t assume you are completely out of danger; your mortgage decision ultimately depends on your current financial condition at that time and that could change due to actions you take during house hunting mode (such as taking on additional debt or making major purchases).
Once you find a lender you wish to work with, inquire about the home buying programs they provide as well as credit requirements and types of income they consider. If you are self-employed, additional documentation or even an income audit which involves speaking with customers and reviewing business records such as P&L statements may be required for approval.
Prequalifying for a mortgage allows you to focus on properties within your price range without waiting while lenders examine your credit history and financial profile again. Plus, having preapproval on hand shows sellers that you are serious buyers capable of fulfilling any promises made to buy their house.
Keep this in mind as you shop for a home: lenders may only run your credit once in any 30-day window that starts when you start browsing homes and ends when submitting an offer on one property. To prevent multiple inquiries from different lenders, most borrowers opt for preapproval from multiple sources before beginning their home search.
Once you find a home you love, the next steps involve filling out a full mortgage application, getting it appraised and paying any necessary closing costs. If all goes according to plan, the final step will be receiving your letter of commitment which officially secures your mortgage loan and closing on it! After which comes celebration time (but be wary – even fully approved loans may come at great financial costs!).