When you’re house hunting, one of the most common questions is “What can I afford?” Getting pre-qualified is a great place to start.
A pre-qualification gives you an estimate of how much you’ll be able to borrow. Whether you’re a first-time homebuyer or already a homeowner, knowing your budget will help narrow your house search.
Here are five reasons getting pre-qualified should be one of your first steps on the path to buying a home.
1. It’s quick and easy
You’ll provide your lender with some basic information about current employment, income, assets, and debt obligations. This information is used to estimate the mortgage amount you might qualify for.
While getting that estimate is a quick process, your lender will also take time to answer any questions you have and help make sure you’re on track for your goal.
2. You can identify your loan options early
There are many types of mortgage loan programs. A pre-qualification can help you determine the type of loan that best fits your situation. Knowing this early in your home search can help you better prepare for expenses such as a down payment and closing costs.
It’s a great time to learn about conventional home loans, construction loans and various government-backed loan options, some of which allow for 0% down payment.
3. A pre-qualification identifies and gives you time to resolve high debt loads
How much debt you have in relation to your income is important when it comes to getting a home loan. A debt-to-income (DTI) ratio is used by lenders to determine if adding a mortgage payment to your outstanding debt is a good fit or even possible.
DTI formulas compare your annual or monthly income to your total debts, or required minimum monthly payments, to arrive at a percentage. A lower DTI percentage can set you up for success in terms of getting a loan and can impact how much you borrow.
If your DTI exceeds a certain threshold, you may not be eligible for certain mortgage loan programs. Paying down credit card debt or increasing your income can help improve your DTI and possibly expand your home loan options.
Getting a pre-qualification early can allow you to make adjustments to your DTI before you’re ready to buy.
4. Be alerted to credit issues that might affect your loan
Your credit score will be a factor for most types of home loans. Use this time to see if any items are negatively impacting your score. Your lender can help you make a plan to resolve any issues.
Payment history is a key component of your credit score. You’ll want to bring any past due accounts up to date and make all future payments on or before the due date.
Your credit utilization ratio is the second most important factor influencing your credit score. Simply put, it’s the ratio of the available revolving credit you’re using versus the total amount available.
Get to know your credit score >>
5. A pre-qualification encourages a thoughtful review of your budget
While a pre-qualification provides an estimate of what you could borrow, it doesn’t show whether you can comfortably afford the mortgage payment. That’s because getting pre-qualified takes your debt into the equation but not your other spending. Things like vacations, eating out and entertainment are not factored in. Because those costs vary from person to person, you’ll want to look at your specific budget. Don’t have one yet? Your lender can help you learn how to track spending and set a budget.
A pre-qualification is an important step toward homeownership. You can get pre-qualified any time before you buy a house, but starting early has some clear advantages. You can ask questions about getting a mortgage, review your current financial picture and set goals to make moving into your new home a reality. At The Bank of Missouri, our lenders look forward to helping you every step of the way.