It is common for first time home buyers to get tripped up with mortgage pre-qualification. One of the reasons for this is pre-qualification gets confused with pre-approval.
The pre-qualification step is just an estimate of how much of a home loan you can afford based upon the financial information you have for the past two years. This is information that you give to the lender, but they do not verify the information at this point with your financial documents and credit check. With a pre-qualification, you have an idea what you can afford, and you can then narrow down your options and look at homes that you can afford.
For serious home-buyers, the pre-qualification process is one that some buyers overlook. But lending standards are stricter than a decade ago, so it is important to know how much home you can afford with a pre-qualification.
Before you talk to a lender and start to pre-qualify for a loan, here are some tips to remember:
- A prequalification is not a loan. Many first-time homebuyers think prequalifying for a mortgage is the same as getting a preapproval and loan. It is not. You need to be approved for the loan before there is a financial commitment on your and the lender’s part.
- You should research the mortgage lender. Getting pre-qualified for a home loan will determine the mortgage amount you get. So, you should get with a mortgage lender who you like and is easy to work with. It is smart to talk to a lender with good reviews and ratings, is highly experienced and can provide good explanations of the entire mortgage approval process. Also, look for a lender who is known to communicate well with the home buyer.
- You do not have to work with that lender. Whoever prequalifies you for a mortgage is not necessarily the lender you must work with to get the mortgage. Most lenders will obviously encourage you to work with them, but you do not need to do so. When you actually get preapproved for a mortgage, you will more than likely be working with that lender because you will have provided all of your financial information to the lender and put in considerable time in the process.
- You need to prepare. First time home buyers should prepare for a loan prequalification just like they would for a preapproval. The more precise the information you provide to the lender, the more precise the information will be about the size of the loan you can afford.
- Do not fudge. Be as accurate as you can about how much you earn, your debts and credit. In the end, the lender will check your financial information anyway, so it will be better for all parties if you are as honest and as accurate as possible in the early stages of the mortgage process.
Now that you have a better understanding of pre-qualification, you should learn more about pre-approval. Let’s say that you have been pre-qualified for a mortgage amount of $250,000. To move to the next step, you need to get a pre-approval. This is where you will provide your financial documents and prove to the lender your assets and liabilities. Necessary documents include two years of tax returns, pay stubs, three months of bank statements, and a profit and loss statement for the year if you are self-employed.
Here are some important tips for the home loan pre-approval process:
Know Your Credit Score
You only need to take a couple of minutes online to order a credit report. But far too many people start house and loan hunting without checking their credit score. It is not a good idea to assume you have a good credit score; there is also a chance of identity theft these days.
Your credit score has a major effect on your mortgage rate and approval. Many lenders want to see a credit score of at least 640, and 680 or more is better. If you have a score below 680, many conventional lenders will deny your mortgage application.
For the most part, getting a home loan with zero down is not possible today, unless you qualify for a USDA or VA loan. All other options, like the FHA mortgages require at least a 3-5% down payment and putting down more is better than less. The money you have in the deal, the more likely the lender is to approve you. Plus, if you put down 20%, you will be able to avoid paying for expensive monthly mortgage insurance.
Stay at Work
Stay in your job until your mortgage is closed and you have the keys to your new home. You do not want to leave your job in the middle of getting a mortgage. The lender will do a final employment and credit check before issuing the final loan approval.