Whether you are buying your first home, moving, or even acquiring a second residence, prequalifying for a mortgage is a vital step for both you and your realtor. The benefit to you is a better understanding of your financial standing and how much money you may be able to borrow.
When you have a clearer picture of your borrowing ability, you will be able to find a home that suits you not just physically and emotionally but financially. A prequalification doesn’t just show that you are eligible for a loan, it shows how much you are likely to be approved for.
This number will help you find a home that matches your finances. When you present a realtor with a letter that shows you have prequalified for a mortgage, it tells them that you are reliable and serious about purchasing a home.
The process of buying a home can be overwhelming and confusing but prequalifying for a mortgage doesn’t have to be a difficult process. There are some basic steps to take and elements to understand to make your prequalification process as easy and painless as possible.
The first and perhaps most important thing to understand is the idea of prequalify vs. pre approved. A prequalification is not a guarantee or agreement for a mortgage. It is a step that will help you be approved for a loan, but prequalifying for a mortgage is a good first step in your future loan application.
At the same time, the prequalification is not a promise of a loan, especially in the current lending economy. On the other side of this, prequalifying for a mortgage from a certain lender does not bind you to them in the way that pre approval for a mortgage does. This can work to your advantage as you can feel free to complete your prequalification with a certain lender and then use that prequalification at a different one after shopping around and comparing prices.
While it may feel like an extra step and a hassle because you will still have to go through the approval process later, the lack of commitment is actually to your advantage as the prequalification will stay with you even if you don’t stay with that particular lender.
You might be unsure about the steps to prequalify for a mortgage but understanding what the lender is looking for will help the process seem simpler. The first step you must take is to gather your financial statements and records. This means pay stubs, tax returns from the last two years, and statements of liabilities such as other loans you have taken out, monthly credit card statements, car payments you are making, etc.
This is all information that you have to present to the lender so that they can evaluate how much money they are willing to lend you. Basically, the lender wants to know how much money you will be able to give them monthly in order to figure out how long it will take you to pay them back.
Generally, a lender would like you to have a debt to income ration under 36%. This means that the percentage of your income that goes to paying off debt is lower than 36%, of course the lower the number the better. Calculating this ratio before visiting a lender can help you decide if you are ready to apply for prequalification or even to purchase a new home. There are many mortgage calculators online that will help you figure out if this is the case.
When you apply to prequalify for a mortgage, the lender will always check your credit, or FICO, score. You have to provide your social security number as well as the social security number for any co-borrowers for this step. An easy way to smooth the process of applying to prequalify for a mortgage, as well as a great way to understand your financial standing, is to check your credit report before you file an application.
You do not need to pay for this report as everyone is allowed a free credit report once a year. An ideal credit score for a lender is around 680-700. The higher the score, the better candidate you are.
If you go to a lender prepared with an understanding of your credit report, then even if you have a lower score you have a better chance of being able to discuss any issues with them. Should you spot a potential problem area in your report before the lender does, then you get to control the conversation by bringing it up and explaining the circumstances.
If a lender understands who you are and what your situation is, they might be more likely to give some leeway even if your report isn’t perfect. If you are a lower-income household or have had some debt problems in the past, you might want to look into applying for an FHA loan. An FHA loan is a federally insured loan that encourages banks to provide mortgages by protecting them against the risk. When you shop for a place to prequalify for a mortgage, ask if they are FHA-approved and what their rates are. FHA loan rates can be quite different so it’s important to compare.
There are so many resources available to today’s consumer when trying to prequalify for a mortgage. In addition to finding a lender who you relate to and who can help you through the process, the internet is an excellent source of information. Besides the online mortgage calculator mentioned earlier, there are many companies that have do a lot of the footwork for you.
Lending Tree is a website that guides you through any loan process and allows you to compare rates online. They also provide information and tips. Try checking out bankrate too, an impartial site that provides actual rates along with customer testimonials. Bankrate and Lending Tree also provide a variety of other calculators that will help you figure out if you are using your finances most effectively.
Remember that throughout the entire process of purchasing a home, including prequalifying for a mortgage but along the way in general, information is power and doing a little bit of research can go a long way.