Once you’ve made the decision to purchase a home, I recommend you get pre-qualified for a home loan as soon as possible. Pre-qualification is a quick but very important step you should take before making any offers.
Pre-qualification serves two primary purposes:
- It demonstrates to both you (and to sellers) how much house you can afford.
- It gives you the purchasing power to make a legitimate offer. (In fact, many financial institutions will not accept an offer on a house without a pre-qualification letter.)
But the benefits continue.
Realtors also prefer that you have a pre-qualification letter before they start showing houses so they know the price range you have qualified for. And, in the event you’re competing with multiple offers on your dream home, most sellers will consider offers with pre-qualification letters before those without.
How to Get Mortgage Pre-Qualification
The first step in the pre-qualification process is finding a lender. If you’ve worked with a lender in the past and were satisfied with the service, you can save time and use the company again. If you’re not sure where to find a lender, ask a Realtor, friend, relative or co-worker for a referral to a bank or a mortgage broker. Most Realtors have built relationships with lenders and should be able to refer to you one that is honest and trustworthy, and it’s against the law for Realtors to get referral fees or other payment from lenders, so if you’ve done your homework on your Realtor, you shouldn’t have to worry about this.
Keep in mind that smaller lending institutions like local banks and credit unions may offer more competitive rates and more personalized customer service than larger companies, although they may have stricter credit score and other underwriting criteria. You can also get mortgage quotes from multiple lenders at once online. Since every mortgage application is unique, it’s valuable to spend some time doing your research and not to discredit lesser-known lenders.
Applying for Pre-Qualification
Once you identify your lender, you’ll need to contact the lender and let them know that you want to be pre-qualified for a loan. They will provide you with pre-qualification paperwork to fill out, for which you’ll need to know your gross monthly income and monthly expenses such as car payments, credit cards and child support. Your expense to income ratio is one factor the lender will use when determining your creditworthiness. Also, be prepared to provide copies of pay stubs and bank statements for the previous three to six months, if requested.
Keeping Your Credit Clean
The lender will also need your authorization to run a credit check, which they obviously need to determine if you will be able to repay a loan.
Every time a prospective lender runs your credit they create what’s called a “hard inquiry” or “hard pull” on your credit report, and your credit score drops ever-so-slightly. But here’s a little known fact: the credit bureaus treat multiple hard pulls with the same few days—and for the same kind of credit—as just one. So if you’re shopping for the best rate, try to time your applications so they fall within a few days or at least a week or two of each other.
This is important because you want to keep your credit score as high as possible to get the best interest rates when the loan terms get locked-in and the loan actually funds (remember, you’re just getting pre-qualification). To prevent any credit score surprises as you shop for a home, you’ll also want to avoid opening any new lines of credit or making any large purchases (like a car) within a few months of shopping for a home loan. You may even want to invest a few dollars in credit monitoring for a few months before you buy a home to get your credit in good shape. A little credit clean-up could save you thousands on your mortgage.
Getting Your Pre-Qualification Letter
After reviewing your pre-qualification application and credit history, the lender will send you either a denial with justification (the reason they couldn’t approve you) or a pre-qualification letter containing an offer stating the terms of the loan. The terms include the interest rate, points (money you pay up-front in order to lower your interest rate), and any fees the lender charges.
Finally, a pre-qualification offer is only valid for a specific length of time—often between 60 to 90 days—so once you’re approved; start shopping for that new home!
Sarah Davis is a licensed Realtor in San Diego, California where she works with a team of real estate attorney/brokers specializing in short sales and foreclosures. Sarah and her husband Cole are also real estate investors focusing on fix and flips and buying and brokering seller-financed notes. Sarah has been writing about real estate since 2006 and also has her own Website: RealtorSD.com.