A Brief Guide to Mortgage Pre-Qualification
Buying a home is one of the important investment decisions that many people make in their lives. Being an important financial decision, buyers need to plan carefully to avoid any problems in the future. Many prospective home buyers, however, make the common mistake of finding a home first before approaching a lender. The truth is it is beneficial to get in touch with a lender at an early stage. This is where mortgage pre-qualification plays a crucial role. If you are a first time home buyer, and don’t know much the pre-qualification process, we are here to help you.
What is a Mortgage Pre-Qualification?
Mortgage pre-qualification is a written statement given by the lender that states the amount of loan you will be qualified for according to the guidelines of the lender. The lender determines the loan amount on the basis of credit and income information you provide to them and/or they are able to pull from other sources. An important point that you need to remember is mortgage pre-qualification doesn’t guarantee that you will be eligible to get a mortgage. You need to meet the specific guidelines for the loan you are applying and provide documentation about your income and assets, job history, and much more.
Is Pre-Qualification Necessary?
Getting a pre-qualification before you apply for a home loan enables you decide a budget. It helps you figure out how much loan you can afford, so that you can find a suitable home that doesn’t disrupt your finances. The process also assures property sellers that you are a serious buyer who is ready to meet the financial obligations associated with buying a property. Pre-qualification doesn’t always involve a credit check, which implies you don’t get a hard inquiry on your credit report, however without it a lender is making an educated guess, at best, about your ability to obtain a mortgage. It is advised to allow the lender to fully ascertain your financial situation prior to spending the time and effort on shopping for a home.
What if a Borrower Doesn’t Prequalify?
To qualify for a mortgage, a borrower needs to meet specific criteria related to credit score, income, down payment and debt-to-income ratio. Every borrower may not pre-qualify for a mortgage or the amount of loan they expect/want. If you find it difficult to pre-qualify, try the following steps:
Increase the down payment: If you fail to pre-qualify, an effective step is to increase the amount of down payment. This increases the loan amount you can qualify for and lower the monthly payments. If you do not have the funds readily available in your bank account, there are other ways to get help with your down payment.
Improve your debt-income ratio (by decreasing the overall debt ratio): The preferable debt-to-income (DTI) ratio needs to be 36 percent or less. To help you understand more how your DTI affects how much of a loan you can afford you can use our mortgage affordability calculator.
Take steps to improve your credit score: Correcting errors (if any) in your credit report, avoiding late or missed payments, and starting a new line of credit with a secured credit card are some of the measures that may improve your credit score. Our mortgage experts can review your credit score with you and help guide down a path to become “mortgage ready” in the future.
Getting pre-qualified is one of the most important steps to purchasing your dream home. Receiving a pre-qualification before you start looking for a property is a smart move as it saves you from a number of unforeseen problems. Additionally, a pre-qualification letter from a highly respected lender in the industry like our mortgage experts at Service First Mortgage - The Davidson Group will give you a competitive edge when up against other buyers.