Spending hours scanning online real estate listings and visiting open houses can give you the scoop on available homes in your area. It might even help you discover neighborhoods you’d never considered or knew about before now. But, home tours can’t tell you the one thing you really need to know to narrow down your home search.
Obtaining a home loan prequalification makes good use of your time by letting you focus on homes that are in your price range. Getting prequalified means you’ll have an estimate of how much money you’ll be able to borrow to purchase a home.
Here are five more reasons a mortgage prequalification should be one of your first steps on the path to homeownership.
1. A prequalification is quick and easy
Simply provide your lender with basic information about your current employment, income, assets, and debt obligations. This information is used to estimate the mortgage amount you might qualify for as you continue on your home search.
2. A prequalification helps identify your loan options early
There are many types of mortgage loan programs. A prequalification can help you determine the type of loan that best fits your situation. Knowing this information at the beginning of your home search can help you better prepare for expenses such as a down payment and closing costs.
Some home loans, like Veterans Administration (VA) and USDA Rural Housing loans, can be available with zero down while others may require up to a 20% down payment. When you complete a prequalification, you can discuss which type of home loan is the best fit for you and your finances.
3. A prequalification identifies and gives you time to resolve high debt loads
Your eligibility for specific home loan programs will be influenced by how much debt you have in relation to your income. 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, based on loan underwriting requirements.
DTI formulas compare your annual or monthly income to your total debts, or required minimum monthly payments, to arrive at a percentage. The lower your DTI percentage, the more money you might be able to borrow for your new home.
If your DTI exceeds a certain threshold, you may not be eligible for certain mortgage loan programs. Paying down credit card debts or increasing your income can help improve your DTI and possibly expand your home loan options.
4. A prequalification alerts you to credit issues that might affect your loan approval
Your credit score is a significant factor in a home loan. Knowing what items on your credit history report are negatively impacting your score allows you to take the necessary steps to resolve them. Bring any past due accounts up-to-date and make all future payments on or before the due date.
Improvements to your DTI will also improve your credit score. Reducing your credit account balances means you’re using less of your available credit. This will strengthen your credit utilization ratio, the second most important factor influencing your credit score. Keep account balances low if you’re unable to pay them in full.
5. A prequalification encourages a thoughtful review of your budget
While a prequalification can gauge the loan amount you might qualify for, it doesn’t tell whether you can comfortably afford the mortgage. Do you spend the majority of your extra income on vacations, eating out, or other entertainment expenses? Are you willing to change your spending habits to make homeownership possible? Now is the time to review your monthly budget to identify whether adjustments are needed to fit your future mortgage payment comfortably.
A prequalification is an important step toward homeownership. When the time is right, it gives you the ability to make an offer on your dream home with confidence. Ready to get prequalified? Call us at 888-547-6541 or visit our home loan center online. It’s quick and easy. Even better, our experienced lending team is ready to answer your questions about the home loan process every step of the way. We can’t wait to help make your dream home a reality!