November 6th, 2018 9:43 PM by Jackie A. Graves, President
Buying a home might
be the most daunting challenge you ever endure. From saving for a down payment
to finding the perfect place, home-buying can be long
and grueling. One of the first steps to help you sort all of that out is
preapproved for a mortgage is similar to getting approved — you fill out a
mortgage application and a lender does a hard credit check. You’ll get back a
loan estimate, which will tell you how much home you can afford. With this
estimate, you’ll know how much you should spend on the purchase of your home.
should I get preapproved?
It’s easy to
browse the best neighborhoods for the nicest homes, but you’re wasting your
time if you can’t afford it. The selling price of the home isn’t the total cost
of the home.
preapproved for a $300,000 loan means you should look for a home that’s less
than that. Other costs, like insurance and property taxes, should be kept in
mind since they’re factored into the total cost.
Knowing how much home
you can afford is your best way of living within your means.
You won’t be able to buy a home that’s out of your budget, which means you have
a greater chance of making monthly payments on time. If you can, try putting
extra cash toward an emergency fund so you can make any necessary improvements
once you move into your home.
preapproval are not the same thing, even if they are used interchangeably. A
mortgage lender might tell you how much you prequalify for if you give a quick
overview of your finances. While helpful, prequalification isn’t concrete enough
to realtors or home sellers.
A preapproval shows
lenders what you qualify for based on your financial history and income. A preapproval uses
your paper trail to determine how much home you can afford. It means you
complete a mortgage application and have a hard credit check done to determine
your creditworthiness. Your income, debt, and assets are reviewed and verified.
proves to realtors that when you walk into a home, you are so serious about
buying it because a lender has showcased your worthiness. Your paper trail
holds much more clout than your word.
should I get preapproved?
The best time
to get preapproved for a home is after you’ve thoroughly reviewed your credit
score to make sure it’s in top shape. Preapprovals are typically valid from 60
to 90 days because your credit report could change in that time. Although, if
your credit score has increased in that time, you might get preapproved for a
lower interest rate.
It’s not a
bad thing to get preapproved more than once. Getting an idea of how to get your
finances in order can be helpful to securing a low interest rate and a home you
can afford. Before you start looking at houses, try getting preapproved for a
While a hard
credit check might dip your credit score, it’s only temporary. To give yourself
peace of mind, get your first preapproval anywhere from six months to a year
before you plan to buy a home. This should give you enough time to clean up
your credit report and build a solid down payment.
borrowers might be asked to provide additional information to prove consistent
income. You might need to show a business license, business bank statements,
and tax returns for your company.
application process, lenders will look at your credit score, credit history, and
debt-to-income ratio — or how much of your monthly income goes towards paying
your current debts.
typically pull from the three main credit bureaus: Experian, Equifax, and
TransUnion. A low credit utilization (below 30 percent), on-time bill payments,
and how much different types of credit you have all come into play.
loan-to-value ratio is also considered. This is where the loan is divided by
the home’s value. Your down payment helps here — the higher your down payment,
the lower your loan-to-value ratio. To lower your loan-to-value ratio, up your
down payment or reconsider the cost of the house you want to buy.
and income history is a big part of your approval as well. Proving you have
steady income and a solid job is important to making sure you will continue to
pay your loan back on time.
to ace your preapproval
starting out in your home-buying journey, there’s a lot to go over. Here are a
few things to keep in mind as you’re planning your purchase.
1. Shop with different lenders. It’s OK to go through
the preapproval process with a few mortgage lenders, as long as it’s within a
month’s timespan. Because each preapproval requires a hard credit check, your
score will be impacted. If you handle your preapprovals around the same time,
it will count as one hard inquiry.
2. Beef up your down payment. The more money you can put down, the better
your loan terms can be. You might be able to avoid private mortgage insurance if you can put
at least 20 percent down.
3. Don’t spend a lot after your preapproval. Whether you’re
doing it for the first go-round or you’re hitting the home stretch, it’s
important to keep your spending low. Avoid making any large purchases from when
you get preapproved to when you close to keep your debt-to-income ratio
4. Continue to pay your bills. Staying up-to-date on
your regular bills is important to your payment history. Falling behind could
mean a big hit to your credit score.
5. One preapproval letter doesn’t mean you’re “approved.” If you’ve shopped
around, choose the lender that offers you the friendliest repayment terms and
lowest interest rates. Remember that mortgage lenders don’t have to give you a
loan if they’ve preapproved you — especially if your credit income and credit
history has changed since originally preapproved.
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