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Thinking of buying a new home? It's an exciting and fearful time. While it's nerve-wracking to purchase a new home, having your ducks in a row will make the process that much easier. Here are some tips on how to get the ball rolling and get pre-qualified for buying a house.
Pre-Qualified vs Pre-Approved
While you've probably heard both terms before, they mean different things in the home buying world.
Here's what each means.
Pre-Qualification
- The first step. It's done to find out how much of a loan you'll qualify for.
- It's based on the information you provide
- It isn't a sure thing. A lender will take a closer look at your financial position during the pre-approval stage.
Pre-Approval
- The next step, when you wish to start making offers on homes.
- You'll need to fill out a mortgage application
- The lender will verify your financial information and credit checks will be performed.
- You'll need an estimate of your down payment
- You'll receive a conditional commitment of a loan amount to be disbursed.
Pre-qualification is beneficial as it actively gives you an idea of how much you can afford. Knowing that before you begin house hunting will make the process so much smoother. You can look at homes that you know are within your price range and save yourself and lenders precious time.
Pre-qualification also indicates to lenders that you're in the financial position to borrow. In simple terms, it may indicate your creditworthiness.
So How Do I Get Pre-Qualified?
Even if you aren't ready to buy a home, a pre-qualification should be garnered to know how much you can afford. It will also make a pre-approval easier when the time comes to start the home buying process.
So what kind of information will the lender look for?
Income
Lenders will need to know how and where the money is coming in. If you're an employee of a company, this means you'll need to provide:
- W-2s or recent pay stubs
- Recent tax returns
It might be a bit more complicated for self-employed individuals. You'll need some sort of documentation to show income. This typically includes:
- Profit and loss statements
- Tax Returns, including Schedule C for sole proprietors, Form 1120S for corporations, or Form 1065 for partnerships.
Assets
You may also need to provide the following
- Bank statements - This will include checking and savings accounts.
- Investment accounts, including CDs
- Retirement accounts
All lenders are different and some may simply request bank statements for a pre-qualification to see that there is income available. The other statements will be required during the pre-approval process.
Debts
To get a clear financial picture, knowing how much debt you owe in correlation with your income is essential. Lenders may ask for:
- What your monthly debts are and how much is owed on each.
- This can include credit card debt, student loans, and car payments.
To prevent homebuyers from purchasing more than they can afford, the FHA (Federal Housing Administration) has guidelines in place to calculate whether a buyer is in the financial position to carry a certain loan amount.
They will calculate if your current debts, along with a projected mortgage amount, exceeds 43% of your income. If it does, you will not qualify for that mortgage amount.
Becoming pre-qualified for a home mortgage loan will give you a good idea about how much you can afford when you're ready to start looking. Not only that, but it will make the pre-approval process much smoother. If you're looking to become pre-qualified, the loan officers at First Savings Mortgage can help. Contact us today for more information.