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Few things in life involve the level of commitment buying a house requires — or the amount of paperwork. But the first step isn’t at the front door of an open house. In markets where houses usually don’t sit for long, by the time you’ve secured your financing and returned to make an offer, that dream house has probably already been sold.
That’s why a successful homebuying journey should start in a lender’s office, not with a call to your real estate agent. Getting preapproved for a mortgage is the first step any would-be homebuyer should take. That’s when you’ll find out how much house you can afford, which will dictate everything else you do.
So how do you get preapproved for a mortgage?
Before calling (or paying a visit to) your lender, there are a few preliminary steps you should take.
Check your credit report
Each of the three major credit bureaus — Equifax, Experian, and Transunion — will give you a free credit report at least once a year. You can request yours online at www.annualcreditreport.com, or you can call 1-877-322-8228, according to the Consumer Financial Protection Bureau.
After you get your hands on the report, look through it carefully, paying particular attention to the “negative information” section. Look for mistakes, such as the spelling of names, addresses, and employer information.
Also, be on the lookout for any accounts you don’t recognize. You can submit any corrections or disputes online or in writing.
Finally, note that requesting your credit report does not affect your credit score. Speaking of which…
Check your credit score, too
It’s important to note that credit reports don’t include your actual credit score. But uncovering this number — which can range anywhere between 300 and 800 — is much easier than it was even in 2015.
This score might be the single most important number you need to secure a mortgage preapproval. According to a 2013 survey of mortgage originations, nearly two-thirds of mortgages went to borrowers with a score over 720. And not only will your score determine whether you get a mortgage at all, it will also determine what interest rate you can get, which can translate into a huge difference in a monthly mortgage payment.
Most credit card companies offer access to your credit score for free if you have an account with them. There are also a host of third-party services, most of which will provide an unofficial credit score without charging you anything. You can also get your FICO score at myfico.com, for a fee, or from any of the credit three major credit bureaus.
If your score is lower than you — or your lender — would prefer, the best thing you can do is pay down your debt and keep making any payments on time. Late payments and high credit utilization are the two single biggest drags on a credit score.
Save some money
There are several schools of thought when it comes to how much money you should have in a savings account before talking to a lender. Some suggest saving 10% to 20% of your monthly income for a year. Others advise having two months of mortgage payments in the bank before trying to get a mortgage. Then there’s also the camp that swears by shoring up three months of total living expenses. And these amounts are in addition to what you have saved for a down payment, which can range from anywhere between 3% and 20% of the home’s purchase price.
The bottom line: Have a few thousand dollars, at least, in savings before asking a lender to determine if you will qualify to buy a house. It not only shows you can afford a mortgage; it proves you have the discipline to make it happen. An empty savings account – or a complete lack of one — is not a good look for a lender.
It’s these two things, credit and savings, that tend to trip up most buyers, according to Carrie Jass, an agent who’s been serving the Naperville, Illinois, area for seven years.
“The biggest hurdles I’ve seen are no credit or poor credit history, or they don’t have enough for a down payment,” Jass explains.
Get your paperwork together
Buying a house is a complicated financial transaction, and it starts with getting pre-approved for a mortgage. Your lender is going to ask you for reams of documents, so start rifling through the filing cabinet and get together:
- Personal information, such as your driver’s license or other government-issued identification, and a Social Security card.
- Tax returns, which provide proof of income for the past two years and a comprehensive first look at your financial status.
- Pay stubs for the past 30 days.
- Bank account statements, typically for the past 60 days.
- W-2s for the past two years. This will also show additional income sources, whether from side jobs, Social Security payments, VA or retirement benefits, alimony or child support, or any investment income.
- Asset details, including investments, financial gifts from friends or family, or any other properties you own.
- Liability details, outlining any outstanding debts, such as credit cards, student loans, or vehicle loans.
- Rent history, especially from first-time buyers.
- Credit report; most lenders will pull this for you, but it can help ease the process along if you have one already.
This is where an experienced real estate agent can help, especially with first-time homebuyers.
“The biggest thing we can do to help would be to help gather the documents, because the sooner the lender gets the documents, the sooner we can get things closed,” Jass says.
Look at your loan options
Once you’ve gathered all these documents together, a mortgage broker can walk you through different loans options from different lenders. If you’ve already got a lender, they can go over what options you might qualify for, such as the length of the mortgage and interest rates.
This is another area where a real estate agent can offer insight, particularly when it comes to conventional loans vs. FHA loans.
“It’s important to have an experienced Realtor who can walk through these properties and know there are certain things — like if a home is built before 1978, and it has some peeling paint,” that might be something the appraiser will flag Cass adds.
“You don’t want to get under contract with a home and maybe the other agent’s not that experienced or doesn’t know the home won’t qualify for an FHA loan because of their more stringent requirements. So, it’s very important to know the difference between types of financing.”
Pick your loan and get your preapproval letter
Most borrowers can get preapproved by multiple lenders — and as long as you’re getting those preapprovals within 30 days, they shouldn’t affect your credit score too harshly. Remember, every preapproval requires a hard credit check, and that can pull your score down a few points, but if you apply to multiple lenders within a short period, it should only report as a single inquiry.
The preapproval letter enables homebuyers to make a competitive offer as soon as they start shopping. Most preapproval letters are good for anywhere between 30 and 90 days. It’s important to know how long yours is valid so you can make the strongest possible offer.
In the meantime, keep paying all your bills on time. And if you can pay off any debts, do so. But don’t close any credit card accounts — it will hurt your utilization rate and could hurt your score.
Finally, it’s worth pointing out that preapproval isn’t the end of the road for a homebuyer. After you make an offer, the loan still has to go through underwriting, where someone will carefully scrutinize all that paperwork you’ve handed over. To make your offer even more competitive, it might help to consider pre-underwriting with a lender (HomeLight Home Loans pre-underwrites our offers).
Header Image Source: (Matthew Henry / Burst)