If you are interested in buying a house, the first step you should take is to get a pre-qualification letter. Being pre-qualified means knowing what loan amount a bank (lender) will grant you, which lets you know what home purchase price you can afford. Not only will most real estate agents hesitate to show you properties without one, it is good to know what you can and cannot afford. Mortgage guidelines are constantly changing and what you thought you could do last year may not be applicable today. Even though you can afford the new payment you may not qualify in other areas. In most cases if you have money to put down and consistent income you can correct any issues you may have with your credit. The sooner you start working on them the quicker you can start looking for a new home.
Getting pre-qualified, also known as loan approval, is based on three major criteria: credit score, income and down payment. There are other factors that can influence the approval but these are the three primary areas.
Everything starts with your credit score. Paying your liabilities on time is important for a good score but it is not the only factor. Even if everything is current, if you are overextended or have multiple credit cards, your score will be lower than you may think. Having a lender or mortgage broker run your credit is the first step they will take. You can certainly shop around but if your credit is pulled too many times over a 30-day period it will begin to lower your score. Based on information on your credit report you can get an idea of what you may be approved for.
Your income is also important, but more specifically, lenders consider what is called your debt-to-income ratio. This simply takes all of the minimum monthly payments on your credit report, adds in your proposed monthly mortgage payment and divides the total by your gross annual income. If that number is greater than 50% you will have a hard time getting approved regardless of how much income you make. If you receive a W-2, your lender should be able to tell you where you stand fairly quickly. Self-employed borrowers can be a little more difficult because of the manner in which they earn income but all that is needed are two years of tax returns to get a decision.
Even though you may have money to put down it is important that it is in your account for at least 60 days. You may get a gift on certain loans but having the money available may not be enough. A good loan officer will tell you the total proposed payment including the property taxes, insurance and anything else that will be included. They will also make you aware of what items you will need to submit for an approval and what you should do before you make an offer. You will know what price range you are approved for and what town’s taxes work with your numbers.
Getting prequalified is not just a good step to take it is a requirement. The more you understand about the loan process and what is needed on your end the quicker you can act once your offer is accepted.