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Whether you are a first-time buyer or looking to move from your starter home, purchasing a home is a rewarding experience. However, many individuals can become stressed with the purchasing process. For this reason, it's important that individuals are aware of what securing a mortgage loan entails for a much smoother process. For this reason, we're going to break down the difference between a mortgage pre-qualification and pre-approval to help you secure the mortgage loan of your dreams.
What does a Mortgage Pre-Qualification mean?
A mortgage pre-qualification lays down the foundation for your loan and is an excellent place for you to start in the mortgage loan process. Simply put, a pre-qualification does not require a commitment between you and your bank. Additionally, your credit history does not factor into the pre-qualification application.
Generally, a pre-qualification assesses whether or not your debt-to-income ratio is fit for the bank. It also gives you an estimate of how much you may be able to borrow. Your debt-to-income ratio is important because it shows how well you pay off your debt and shows lenders the likelihood of you paying them back. Here are some of the things that may be included in the pre-qualification application:
- estimated credit score
- purchase price of the home
- your expected down payment
- monthly debts
- how you would like to structure the loan
What does a Mortgage Pre-Approval mean?
A mortgage pre-approval is similar to the actual mortgage application in that it involves the same steps where you provide more detailed information such as income and assets. A lender will send you a letter indicating how much you qualify for based off of your financial history. This means that the lender will pull your credit score and review your credit history. Here is what lenders will look for when it comes to your credit history:
- outstanding debt
- length of credit history
- types of credit used
- new accounts
Keep in mind that there are other factors that lenders will look at other than your FICO such as your earned income, the amount of money you have in your bank account, and the length of time you have been employed.
How to prepare to get the best mortgage loan possible
Purchasing a home is a long-term investment. With that said, getting a mortgage loan with an excellent rate is going to be important to any individual. Here are 3 ways to prepare for the best mortgage loan for your needs:
1. Get your Credit Score: Understanding what is affecting your credit score is an important first step for individuals looking to purchase a home. You should always know where you stand and see if there is anything you can remove from your credit score that can help boost it before seeing a lender.
2. Save: For the most part, you will need a down payment in order to secure a loan. Start saving until you have at least 3.5% of the loan before applying for a loan. 3.5% is the minimum down payment with an FHA loan with a 30-year fixed-rate mortgage.
3. Manage Debt: Debt plays a big role in the type of mortgage loan you can secure. Start paying off debt as soon as possible so you will look more attractive to lenders moving forward.
Securing a mortgage loan can be stressful but not impossible. It's important that individuals are not only aware of the lending process, but can put themselves in a position to get the best deal possible. Remember, it's important that you work with lenders who will work to give you a loan that you are comfortable with. Be sure to contact your local lender at First Savings Mortgage to secure the best loan possible.