The home buying process can be daunting, especially if you’re a first-time buyer. It would help if you considered many things, such as the mortgage process, finding the right home, and getting approved for a loan. But of course, you don’t have to do everything all at the same time.
One of the most important steps is getting prequalified for a mortgage, which will give you an idea of how much you can afford. Of course, there is a slightly less official preapproval process, but in general, getting prequalified is a better idea.
The difference between prequalification and preapproval is that the former doesn’t involve a full review of your financials. In contrast, the creditor often vets those who go through preapproval. So, here are five reasons why you need to get prequalified before buying a home:
1. Get an Honest Assessment of Your Budget
When you get prequalified, hard lenders will consider your credit score, income, savings account, intent to buy, and other factors to produce a preapproval number. When you have this in hand, you can tell how much you should be able to spend on a home.
Although getting preapproved can help you determine your budget, getting prequalified is not the same thing. A prequalification letter only gives a reasonable faith estimate on how much you may be able to borrow, but it’s not an official determination of your loan amount. This is because a prequalification letter doesn’t consider your credit score, assets, liabilities, or debt-to-income ratio.
2. Know How Much You Can Afford
Even if you’re shopping for homes under $200,000, it’s essential to know how much you’ll be able to afford. Creditors want to see that you can spend 28% of your monthly gross income on housing costs. It doesn’t matter if you make $48,000 a year or $20,000 a month; creditors will look at the monthly housing costs as a percentage of your income.
If you’re spending more than that on housing, then you may need to scale back your spending or wait to buy a home that’s in your budget. Or, if you’re planning to borrow beyond the conforming loan, you’ll have to prepare for higher down payment costs that come with the jumbo loan.
3. Find out if You’re Preapproved
Many home buyers start their house hunt before discovering if they’re preapproved. However, this is a big mistake because you’ll have difficulty making offers on homes while you shop for the best deal.
Finding out whether you’re preapproved before buying a home can help you know what kind of homes to consider. For example, if your preapproval letter states that you’re only qualified for a $200,000 loan, and your budget is $300,000, you should be looking for homes that fall within that price range.
4. Get Past the Creditor’s First Screen
When you apply for a mortgage, the creditor will pull your credit report to see if you qualify. If your score is below 620, you’re likely to be turned down for a loan. Getting prequalified will help creditors know that you’re serious about getting a mortgage, so they’ll give you past credit problems a second look.
Additionally, getting prequalified for a mortgage may help you get past the creditor’s first screen, which will improve your chances of getting full approval. Besides, most creditors will try to work with you to find a solution if you cannot qualify for the loan.
5. Determine if You’re Getting the Best Interest Rate
When you get prequalified, the creditor will provide you with a ballpark interest rate to estimate what you might pay in total closing costs. However, getting preapproved will allow you to determine whether you can get a better rate on your loan.
Getting preapproved is helpful because you’ll know the exact rate on your home loan before you start looking for houses. When you get preapproved, you can make your offer on a home knowing that you have the best interest rate. And when you get preapproved, creditors will often beat your rate by 0.25%, which can help lower the total closing costs on your loan.
It’s important to remember that prequalification is not a guarantee of financing. Instead, it’s an estimate of the amount of money you’d be able to borrow from a creditor. For example, prequalification situations may be based on stated income, and there is no appraisal process.
As a result, the price listed in the prequalification letter may not be exact. That said, a creditor-provided prequalification letter can be a way to show sellers that you have intent and the ability to purchase their home. So, get prequalified before you get preapproved to help get your home buying process off to a solid start.