Coming up with the funds to finance a home purchase may be quite difficult for first-time buyers. Instead of going straight to an open house, we sometimes go on a trip to the lender’s office for a loan. Every homebuyer should understand that there are two steps involved in a loan which is getting pre-qualified and pre-approved. You may have heard these terms if you’re looking to buy a property. Most of the time, they can be mistaken for one another and are used interchangeably. However, if you’re serious enough in funding your purchase, you should be aware that there are several differences between the two.
A buyer can be pre-qualified long before they start house hunting. A pre-qualification is a quick and informal process that gives the buyer the purchasing power to make a legitimate offer. This is mostly shown through a pre-qualification letter to let sellers know the price range you’re looking for.
Find the right lender
If you happen to work with a lender in the past and were satisfied with their service, you can save a lot of time and avail their services again. Most investors have a broad network when it comes to lenders if you haven’t any idea of where to find one. Local banks and credit unions may offer competitive rates than larger corporations. They may be inclined to have a stricter credit score requirement and other underwriting criteria though. Therefore, it’s important to do a little research and not to discredit lesser-known lenders.
Once you’ve found a lender, they ask authorization from you to run a credit check. This is obviously done in order to determine whether or not you’ll be able to repay the loan. That’s why it would be in the buyer’s best interest to keep their credit score as high as possible to get the best interest rates when the loan terms lock-in.
The lender will eventually provide you with the necessary paperwork to fill-out. You need to be aware of your gross monthly income and usual expenses such as car payments, credit statements, or child support. They might look into your expense-to-income ratio to determine your creditworthiness.
Issuance of the letter
After a thorough review of your application and credit history, the lender decides whether to deny or approve your application. The pre-qualification letter states the terms of the loan such as the interest rate, the points or the money required to pay upfront to lower your interest rate, and any fees charged by the lender.
Take note that the pre-qualification is only valid for a specified length of time (60-90 days). Getting pre-qualified can definitely be helpful when it comes to making an offer to a seller. However, your pre-qualified amount isn’t guaranteed since it’s only based on the information you’ve provided. This brings us to our next point, which is:
A pre-qualified buyer doesn’t carry the same weight when it comes to being pre-approved. Getting a pre-approval is a more definite application in getting a loan to purchase a home. It involves an intricate process wherein the lender looks at a variety of aspects in your financial situation.
Finding a lender and getting pre-qualified
The first step is similar to being pre-qualified for a loan. It’s possible to be pre-qualified with a number of lenders. Choose the right one which you think would help you out in purchasing your new home. Remember that what you’re getting pre-approved for isn’t always an accurate number of the actual loan.
Here are some of the requirements before you get a pre-approval letter.
Proof of income
A lender can only issue an approval letter once the buyer proves that they have the money to pay the mortgage every month. This can involve proof of income, tax returns, or last two pay stubs to back up your statement for approval.
Proof of assets
The lender has to ensure that you have the right amount of money for a down payment. They need to have insight over your assets by providing them with your previous bank statements. Most loans come with a requirement wherein the buyer has a private mortgage insurance (PMI) or pay a mortgage insurance premium. Depending on the type of the loan, the pre-approval of a buyer would be based on the credit score, debt-to-income ratio, and several other factors.
Good credit score
Most lenders require a score of at least 620 or higher to approve a conventional loan or Federal Housing Administration (FHA) loan. The reasoning behind this is that lenders reserve the lowest interest rates for those who have a score of 760 or higher. To put it simply, lower scores would mean a larger down payment. If you find yourself below the required credit score, work with your lender in order to have suggestions to improve it.
Not only does the lender require you to provide previous pay stubs, they would most likely call your employer to verify employment and salary or if you’ve recently changed jobs. If a buyer happens to be self-employed, they may need to provide significant paperwork concerning their business and income. This may involve the stability of the self-employed buyer’s income, the nature of the business, the financial capability of the business, and the ability of the business to continue generating a sufficient income to enable the buyer to satisfy the mortgage.
WHAT HAPPENS NEXT?
After you’ve been pre-qualified and pre-approved, the final step would be a loan commitment. This is only issued by the lender when it has approved you as well as the property that you plan to purchase. Your income and credit profile will be checked once again to make sure that nothing drastic has changed during the time of your approval. A mortgage commitment letter is given within three business days of receiving your complete mortgage application. It outlines the loan type, amount, terms and conditions, estimated interest and closing costs, and other factors.
Once you’ve finished the whole process and received your mortgage commitment letter, this lets sellers know how serious you are in purchasing their property. This gives you a huge benefit and helps you cut the competition to a significant degree. If you’re truly invested in a dream home that you want to live in, do everything you can in order to acquire it.
Ultimately, when it comes to cash buyers, all they need are proof of funds so they could start offering. Home buying can be a rigorous process especially for first time homebuyers. Strategy Properties can help you out in your real estate investment ventures and help you with the ins and outs of the home buying process. To learn more, contact us at (734) 224-5454 or reach out to us via email at email@example.com.