The homebuying process is often full of excitement and adventure. This is especially true when going to showings of different houses. It's also fiscally responsible, too, as buying a home is often far better than renting.
A common issue than many buyers face, though, is financing. Fortunately, getting prequalified can significantly speed up the process.
Not sure where to start? Don't worry, we’ve got you covered.
Let's take a look at everything you need to know about loan prequalification
Understand Your Current Finances
Before you begin pursuing financing for your home, it's important to be aware of your current financial situation. While having a high income will better your chances at lenders looking at you as a favorable candidate, this could be offset by having a large amount of debt.
For example, let's assume your current monthly income is $12,000. Although this places you in the upper percentile in terms of how much money you make, having a $6,000 per month obligation in credit card/loan debt is something that lenders will take into consideration.
Similarly, though, someone who makes $4,000 per month but has no outstanding debt will likely find it easier than they expect to secure financing.
Additionally, you also need to consider how much money you're capable of putting down on your home. Those who make a down payment of less than 20% are often required to purchase private mortgage insurance (PMI) in order to help protect their lender against losses.
This will lead to a higher monthly payment, which may be something your financial situation isn't capable of accommodating. So, it's important to be realistic about how much you have available to spend before you choose a home to buy.
Documentation to Provide
In order to prove your reliability as a borrower and get prequalified for a loan, you'll need to tell your potential lender a bit about yourself.
This involves providing documentation for things like:
- Your past employment history
- Your debt-to-income ratio
- Your liabilities/assets
- Current income
- Credit score/credit history
Depending on the lender, you may also be asked about your previous loan history, such as auto loans, other mortgages, etc. If you're self-employed, you may be contacted to provide additional documentation.
This information is collected to provide insight into how much money you have available and how likely you'll be able to repay your loan on time. If your lender only requests some of the above info, you could offer them additional information to show that you're serious about prequalifying.
Determine Your Purchasing Ability
Based on the above information, your loan officer will help you determine how much you can reasonably spend based on your financial situation and obligations.
Since mortgage repayment terms can be variable (often in 10, 20, or 30-year periods), you'll likely focus more on your monthly payment as opposed to the total price of the home you're looking to buy.
This isn't to say, though, that there won't be a price ceiling in your budget — you can only receive so much money through a mortgage loan.
But, if you're looking at a home that falls within the middle of your budget, your loan officer will help you decide what repayment period is best for you. For example, if your maximum budget is $500,000 for your home with a 30-year repayment period, it may be worth considering a $300,000 with a 10-year repayment period.
It's also worth considering how your repayment plan will affect your down payment. A shorter-term loan with a low down payment will result in notably high monthly costs, so keep this in mind when deciding.
What to Expect Afterward
After you've been prequalified for your mortgage, you can move onto the more involved aspects of purchasing your home. These include receiving an estimation of property taxes and homeowners' insurance, your maximum loan amount, etc.
From here, you'll be one step closer toward completing the home buying process.
An added benefit of prequalification is that it shows independent sellers that you're serious about purchasing their home. It also displays that you're capable of doing so, as you'll have hard evidence of your total amount of financing.
As you may expect, this will help separate you from buyers who haven't obtained prequalification from a lender and will help expedite the rest of the buying process.
Don't Be Afraid to Ask Questions
Buying a home can be intimidating, and so can dealing with all of the prequalification requirements. But, your loan officer is there to help you make the decision that's best for you, so don't be afraid to ask them questions.
You also have no need to feel pressured into a particular repayment plan or repayment term. If the options they've outlined for you don't quite fit your taste, you could ask if there's any flexibility when it comes to your payment period, the lender you borrow from, etc.
The more you ask your loan officer, the better chance you have of establishing financing terms you're comfortable with. After, your payments will likely last at least a decade, so you'll want to make the effort to ensure your financing is right for you.
Understanding Loan Prequalification Can Seem Difficult
But it doesn't have to be.
With the above information about loan prequalification in mind, you'll be well on your way toward getting the keys to your new home as quickly as possible.
Want to learn more about how we can help? Feel free to get in touch with us today to see what we can do.