Shopping for your first home is an exciting time! You dream of touring beautiful properties and looking online at all the new listings, picturing in your mind how it would feel to live in your dream home. As fun as this process is, you may have many questions and wonder where you should start. You should know that before you start touring homes, the first step for a first-time homebuyer is to get pre-qualified for a loan.
Why Pre-Qualification Is Important
There are many steps to buying your first home. It’s tempting to start searching for your dream home before getting your finances involved. However, house-hunting without your pre-qualification is like putting the cart before the horse. A wise shopper would ideally go into the search informed and ready to do business.
Let’s say you see an open house in your ideal neighborhood and want to check out the property. You go to the open house and look around and fall in love with the home. You talk with the realtor that is showing the home and find out that two other families are ready to make a bid to purchase the property. If you don’t have your pre-qualification already established, then you most likely lose your chance of buying the home. If you have your pre-qualification for the loan already in place, you show the realtor and the property owner that you are serious about the purchase and ready to put in your offer.
Pre-qualification is a must because it allows you to know how much you can afford to pay for your new home. You may have a budget in mind, which is a great start. But you might be surprised to learn how much you will pre-qualify for or if you are financially ready to buy a home at all. A recent Nerdwallet post states, “A mortgage pre-approval is more than an estimate, and it’s an offer by a lender to loan you a certain amount under specific terms.” The mortgage pre-approval is not a guarantee for a loan.
Pre-Qualification vs. Pre-Approval
Pre-qualification is an estimate for credit to show how much you can spend on your new home. A pre-approval is more valuable because it means the lender has checked your credit to approve a specified loan amount for a period of approximately 60 to 90 days. Most sellers prefer that buyers have a pre-approval letter from their lender to bid on the property. If you are just getting started, you might want to look into pre-qualification. Although, when you are ready to do serious house-hunting, consider getting the pre-approval letter.
How To Get A Mortgage Pre-approval
Start with clearing up your credit. You should check your credit history and credit score. Dispute any errors you see on your credit report with those credit bureaus. A credit score of 700 or higher is best, but a score of at least 620 is most lenders’ recommendation. You can check your credit for free online for soft inquiries that will not damage your credit history.
What You Will Need
You will need to provide a list of documents ready when you call the lender. They will want to know your employment history, income, a list of all debts you have, and all of your financial accounts so they can check your credit. Our previous post has a full list of items you will need when applying for loan approval. Typically, you will need to show your proof of income (W2 tax form or pay stubs from the last two years) and 1099 form for any additional income sources. If you are self-employed, you will need to provide your tax return from the previous two years. If someone is gifting you the money for the down-payment, you will also need a paper trail to prove that it is a gift, not a loan.
Do Your Research
Contact more than one lender so that you find the best fit for your financial situation. Many people start by calling their bank since they already do business with them. You may find that other lenders offer lower interest and more cost savings, so it’s best to shop around and do your research. You’re realtor can recommend a match for you if you aren’t sure who to call.
Once you’ve found your lender, you will need to fill out a credit application, which may include a fee. Then the lender will verify your debt-to-income ratio and make a hard inquiry into your credit history. During this period, you should not attempt to take out any additional loans, credit cards or miss any payments on your debt. You want to show the lender that you are responsible for your money and the repayment of loans and debts. Any new negative marks on your credit will be considered by the lender and may require you to provide additional documentation. Once this process is complete, you will receive the pre-approval letter, and you can start house-hunting!
Contact us when you are ready to start searching for your dream home!