How to Pre-Qualify for a Home Loan

You have decided to buy a house but don't have enough money to buy it. Your situation is expected; few people have enough money to buy a home. However, banks and mortgage companies offer mortgages that give people the difference between their savings and the home price they want to buy.

While many people find the home they want and then shop for a mortgage, it's a good idea to pre-qualify for a home loan and understand your options first. Before you start looking for a home, knowing how much you can afford to borrow is important.

Check your credit score.

The first place to start is to review your credit report and get your credit score. Check with your bank or credit card companies, as they often offer them for free. Each of the three national credit bureaus, Equifax(Opens Overlay), Experian(Opens Overlay), and TransUnion(Opens Overlay), is required to provide you with a free credit report each year.

You can request a report by visiting annualcreditreport.com (opens overlay) or calling credit reporting agencies. If you plan to buy a home with your spouse or significant other, they should request and review your credit reports. Check your credit reports for incorrect information, and if you find any, contact the credit reporting agency to request a correction.

 A high score improves your chances of getting a home loan and can help you qualify for a lower interest rate.

Before you find the house of your dreams, look for a mortgage. This will give you time to lower your credit account balances, pay your bills on time, and review your credit report for accuracy to raise your credit score.

Know your debt-to-income ratio.

Your monthly payments on current and future loans should generally be less than 43% of your monthly income. However, based on this calculation, the amount you qualify for may need to be corrected. To determine how much you can afford, assess your situation and consult a financial advisor. Divide your monthly payments by your gross monthly income to determine your debt-to-income ratio.

Use this formula to estimate your debt-to-income ratio: A/B = Debt-to-Income Ratio:

Stands for recurring payments (including projected mortgage payment) on your credit cards, student loans, car loans, leases, and other obligations.

For example, if your monthly income is $5,000 and your monthly debt and future expenses are $1,000, your debt-to-income ratio would be 20%.

If your debt-to-income ratio is over 43%, you may still qualify for a mortgage if someone else (such as your spouse, relative, or someone living in the household) completes the application with you. During the application process, we will ask you for co-applicant information.

Starting the process early can give you time to pay off some credit card balances or smaller debts, lowering your debt-to-income ratio and improving your credit score.

Your Initial payment

Putting down more money can lower your interest rate and build equity in your home faster. Private mortgage insurance (PMI), which protects the lender if you default on your mortgage and loan, is required if you have less than a 20% down payment on a conventional loan. Your monthly mortgage payment is increased by the annual cost of PMI, which is roughly 1% of your outstanding loan balance. You can request that PMI be removed when your due balance reaches 80% of the original loan amount.

Some types of loans may require a lower down payment, such as 3% to 5%. Federal Housing Administration (FHA) loans require a 3.5% down payment, while US Department of Veterans Affairs (VA) loans do not require a down payment.

Go to a lender to get pre-qualified.

Once you feel ready to buy a home, getting the right mortgage is your next big decision. To get the best deal, talk to several lenders and compare their mortgage interest rates and loan options.

With mortgage pre-qualification, the loan officer will inquire about your income, place of employment, regular expenses, amount of cash on hand for a down payment, and possibly other details. Then they will give you an estimate.

Finalize your mortgage

Once the seller has accepted your offer, you can proceed with the mortgage process and take possession of your new home. The first step is to decide which lender you want to use and the type of mortgage that best suits your needs.

You always know your monthly principal and interest payments with a fixed-rate mortgage. Fixed-rate mortgages offer terms of 10, 15, 20, 25, or 30 years. An adjustable-rate mortgage (ARM) may offer a lower down payment than a fixed-rate mortgage. An ARM provides a 30-year term with an interest rate fixed for 5, 7, or 10 years (depending on the product selected) and adjusts annually after that for the remainder of the loan term.

You can save on interest over the life of your loan by choosing a 15-year term instead of 30 years. 

Your lender will order an appraisal to determine if the home's purchase price compares to similar homes in the area. The appraiser will examine the house and then compare it to similar homes for sale nearby. While you wait to close, you mustn't refrain from doing anything that will change your financial situation, such as applying for new credit, changing jobs, or falling behind on your current credit.

Once your home loan is approved, your lender will set a deadline.

You'll get a closing disclosure three business days before the transaction. This document details all funds and expenses the buyer and seller pay before or at closing. This document will show the loan amount, interest rate, loan term, origination fee, title insurance, property insurance deposits and taxes, and other fees. Please review the closing statement carefully and compare it to the loan estimate you received to ensure no surprises.

You will receive a final closing disclosure at your end. You received This document's final version three business days before closing. Check out the last-minute changes.

The most common closing fees are:

• Attorney fees—for any legal representation for preparing and filing documents

• Inspection Fees: To check for structural problems; Also for termites and lead paint in old houses and their roofs

• Origination Fee – To process and service your loan

• Subscription Fee: To review your mortgage application

• Title Fee – for a search to confirm no tax liens on the property and for insurance to protect you if a problem is discovered.

Buying a home is a significant investment and should not be taken lightly. The first step is understanding how to position yourself financially for pre-qualification and approval. Let us help simplify the buying process while allowing you to enjoy the home-buying experience.