Home Loan Pre-Qualification

The last thing you want to encounter while purchasing a home is a disagreeable surprise. The home buying process can be intimidating and exhausting, but every bit of preparation equips you to land in your desired home. A crucial consideration is finding a property you can afford. Loan pre-qualification is essential for removing guesswork and speeding things up. Learn the steps for pre-qualifying.

Understand the Benefits of Pre-Qualification

Pre-qualifying for a loan is not a requirement for a home purchase. However, this step can make your buying process much more manageable. The primary purpose of pre-qualification is to figure out an approximation of the maximum loan you can receive.

This process is not an official request for funds, which means it proceeds quickly, and you don't need to supply documents to the lender. The lending representative asks questions to understand your financial situation and provides an estimate of attainable loans.

The procedure saves you time and energy down the road. You won't get your heart set on a home far out of your price range and face the disappointment of loan rejection. You also protect your credit score from an unnecessary inquiry, meaning you can pre-qualify at any time without repercussions. If you can't reasonably afford the home you want, you can work with your advisors to improve your credit and finances.

Work on Your Credit Score

Check your credit report to understand how lenders assess your creditworthiness. If you plan to buy a property with someone else, such as your spouse or significant other, access their credit reports as well.

You can contact the credit reporting agencies individually to receive your credit file. The three national agencies are Experian, TransUnion, and Equifax. Each company must provide you with a free report yearly, though you may sign up for free or paid credit monitoring accounts with each agency.

Many banks and credit card companies provide complimentary score updates. Check your accounts to determine if any offer the service. You might also consider signing up for a free credit monitoring account with a personal finance company.

Your score falls between 300 and 850. Higher scores boost your odds of getting a loan with a lower interest rate, so check for errors that may be dragging your rating down. Dispute inaccuracies by contacting the bureau that has the erroneous information. Provide documentation that supports your claim. The Consumer Financial Protection Bureau provides sample letters and instructions for credit disputes.

You may resolve the issue faster by contacting the party that furnished the inaccurate data. The agencies have 30 days to investigate your claim, but the investigation is not exhaustive. Reaching out with a genuine appeal to the furnisher may expedite a correction. If the error results from a case of mistaken identity by the bureau itself, the agency can resolve the issue independently.

Keep your credit in excellent shape with timely payments and reduce your balances. Experts recommend no more than 30% utilization of your available credit card funds. By working on your credit during the pre-qualification phase, you prepare yourself for the best loan rates.

Improve Your Budget

A more significant down payment qualifies you for better loans. Putting more money into your property means greater equity for you and less risk for the lender. Remember that you must also pay closing costs with your home purchase, so prepare to save for that expense.

No-money-down loans are available in unique circumstances. Active duty service members, veterans, National Guard members, reservists and surviving spouses of veterans may access 0% down loans backed by the U.S. Department of Veterans Affairs. USDA-backed loans for homes in rural locations may also be available for no money for select borrowers.

Federal Housing Administration loans require 3.5% down, but other conventional loans may only necessitate a 3% down payment. If you put less than 20% into your home on most mortgages, lenders require you to pay private mortgage insurance, adding another bill to your housing costs. This additional coverage indemnifies the financing company if you default on your loan. PMI costs average about 1% of the loan principal. Once you invest 20% equity into your home, you can ditch the PMI.

Your debt-to-income ratio also affects your creditworthiness. Financial advisors suggest your monthly debt payments be no more than 43% of your gross income. When calculating your expenses, only include your rent, mortgage, loan payment, minimum credit card payment, student loan, auto lease or loan, personal loans, alimony, child support, or other obligations. Your living expenses, such as utilities, food, and entertainment, do not count.

If your DTI is above 43%, your co-applicant's information may help your numbers. By pre-qualifying, you can correct problem spots before officially applying for a loan. Take steps such as increasing your income, lowering your debt, and boosting your savings to become more creditworthy.

Talk With Lenders

Once you compile the necessary information, head to lenders for the unofficial results. Your bank and credit card companies are excellent places to visit first, but don't stop there. Speak with loan officers from various companies to shop rates. You can often get results in a couple of days or less.

The lenders will ask for your income, job stability, monthly budget, down payment amount, and other pertinent details. At this stage, the creditors don't require official documents, so you won't need to verify the information. Still, you should accurately represent your financial state to get a realistic idea of what loans you may qualify for. Some banks and financiers operate entirely online, so you can input the information from the comfort of your home.

Print your pre-qualification results to guide you in your house-hunting. Bear in mind that pre-qualification is not a promise to lend to you. The information is simply a guideline. Once you are at the homebuying stage, apply for loan preapproval, which requires a hard credit check and verification of your data. In turn, you receive a guaranteed loan offer for home purchases.

Stay Up to Date on Homebuying Support

Buying a home takes a lot of dedication, but your persistent planning will pay off. Your house can be the springboard to another home that suits future needs or a tool for financing. Contact FHA Insider for help answering your questions and connecting to a home loan expert or advocate.