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This Old House - Do-it-Yourself

Importance of Getting Pre-Approved With Your Mortgage Loan

Written by Posted On Wednesday, 17 January 2018 06:27

Are you a first-time home buyer, looking for the perfect place to spread your roots? Maybe you’re a retired veteran looking to purchase your first home? Either way, there are many different home loans available tailored to a specific need from the potential homeowner. While your loan officer can tell you about the different programs, none of them will be available to you if you don’t initially qualify for a home mortgage. That’s why it’s important to become pre-approved for a home loan. Here are a few things that you should do way ahead of time, before you visit or contact your lender for the first time. 

Where Do You Stand With Your Credit Rating?

One of the biggest determining factors in finding out if you’re going to be pre-approved for a loan through a lender like Eagle Home Mortgage is your credit score and rating. Your score is a number ranging from 300 to 850, with ratings in the 800s meaning excellent. Having a high score makes you a good candidate for pre-approval and eventually final loan approval. 

Your FICO score is based on several factors, such as:

  • Number of open accounts. 
  • Overall credit history.
  • If you’re maxing out credit card spending or keeping the balances low. 
  • How timely you make your payments. 
  • Types of open credit accounts. 
  • Any type of negative rating or information reported by the credit bureaus. 

Keep in mind that hard inquiries into your account from other lenders can affect your score as well. The credit bureaus, Experian, Equifax, and TransUnion report pertinent information publically to financial entities globally. Knowing what’s on your credit report and looking for discrepancies before you apply for a home loan is highly recommended. 

Proof of Income

When prequalifying for a traditional conventional mortgage, or a government-backed loan, you’ll need to provide adequate proof of income. For most people, this proof comes from their weekly or bi-weekly paychecks. If you’re self-employed or you get an alternative form of income, you may have to provide tax documents from your prior years filing. Talk to your tax advisor or accountant and obtain the proper forms of documentation. This may include a profit and loss statement or business bank statements that correspond to your accounts receivable. Bring in original documents, not copies. Having all of this information in place before you initially meet with your lender will help speed the process along. 

How Much Home Can You Buy?

You have your eyes set on that cute home on the quiet cul-de-sac, but you need to make sure you qualify for financing first. Ask yourself, do you make enough to afford to live there? Even if you qualify with an excellent credit score and flawless payment history, you might not make enough to get final approval through the bank's terms. The main goal is to keep your debt-to-income ratio low and also have a significant cash down payment. 

Keep in mind that just because your lender pre-approves you for a specific amount doesn’t mean that you can afford it. Miscellaneous fees, utility bills, and daily living expenses are not factored into loan approval, but are something to consider when your lender gives your final payment amount just before closing on the loan. There are other ways to make the monthly mortgage payment cheaper. One is by offering a lower initial offer on the home, to see if you can drive the costs down. 

Provide a Down Payment

While a significant down payment on a home will minimize the total amount owed and affect the loan terms, it also increases your probability of getting final loan approval. Many government-backed loans such as FHA or VA loans only require a small amount down—anywhere from 1 to 5 percent. While it may be a minimum requirement, putting more down will renegotiate the loan and the total amount owed. A payment of 10 to 20 percent of the balance of the mortgage is satisfactory for most banks to move to final approval through underwriting. It shows that you’re less of a risk to them and they will be more likely to lend you the money you need. 

Getting pre-qualified takes the guesswork out of getting the final approval. It also may make your realtor work harder for you. While there are always things that can interfere with closing on the loan, pre-approval shows you’re acting in good faith that you’ll fulfill future loan commitments.

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