You wouldn’t go into a clothing store without knowing how much you can spend, would you? You need to know how much you can afford before you start shopping. The same is true when you are house hunting. Before you start looking at homes in your area or contacting buyer’s agents, the first thing you need to do is prequalify for a home loan. The prequalification process gives you an idea of the type and size of mortgage you can get. As a first time buyer, getting prequalified before you contact an agent sends a signal that you’re serious about buying. Buyers and agents prefer to work with someone who is prequalified!
What you need
When you prequalify for a mortgage, the lender is giving you an estimate of the amount you can borrow based on the information you supply. You should provide the lender with your monthly income before tax and other expenses as well as the amount of debt you pay each month.
Because the process is informal, the lender doesn’t need to verify your income or pull your credit report. You can prequalify for a home loan over the phone or online using a prequalification calculator. Even though prequalification isn’t a formal commitment, you want to provide the lender with information that is as accurate as possible so that all of your ducks are in a row if you decide to move on in the mortgage process.
Prequalified isn’t preapproved
Getting prequalified for a loan isn’t the same as getting preapproved. The lender isn’t rubber-stamping your application. Instead, the prequalification process is meant to give you a sense of whether you’re ready to proceed. If your income is too low, the prequalification process lets you know how much more you’ll need to earn each month before you can get a mortgage. If you have a lot of other debts, such as credit cards or student loans, the prequalification process will help you see what an ideal amount of non-housing debt is.
Taking the next steps
You can go in one of two directions once you go through the prequalification process. You might find that your finances need a bit of work before you can be approved for a mortgage. Or you might find that you’re ready to move on to the next steps: Looking at homes and getting preapproved for a mortgage. During the preapproval process, the lender will confirm your income and check your credit history and score. You’ll need to provide more specific information, such as your Social Security number, and give permission for a credit check.
Real estate agents in the Atlanta area are typically more willing to work with buyers who can show that they’ve been prequalified for a mortgage. Prequalification and preapproval let an agent and a potential seller know that you’re interested and ready to buy a house.
Image source: Flickr
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