When you're getting ready to buy a home, the two biggest factors to focus on are your down payment and your credit score. They don't count for everything, but these are two major criteria that may impact both approval and your interest rate, so it's good to get started early.
Most people believe they will need 10 to 20 percent to buy a home. This is not true. There are several loan programs that will allow for low down payments. FHA loans require only 3 1/2 percent and Conventional loan programs allow for as little as 3% down for a first time home buyer. A First Time in Texas Home Buyer is defined buy anyone that has not owned a home in the previous 3 year period. Still, saving for the largest down payment possible will help with loan approval as well as the best term options that can be offered to you. 20 percent down will remove the requirement for mortgage insurance on the loan. Mortgage Insurance will increase your total loan costs or with monthly mortgage insurance will increase your monthly payment. So a goal of 20% or more is great but don't be discouraged if you can raise that amount. You will still have options available to you with almost any down payment you save above 3 percent.
How's your credit score? The higher it is, the more likely you'll be to get a better offer from your lender. And sometimes a higher score can increase your chances of getting a low interest rate.
Here are some factors we consider when reviewing your credit. They don't account for everything, but they're the main elements we look at.
Have you had a lot of late payments lately?
How long have you had your oldest continuous line of credit? The longer, the better, usually.
Are your credit cards maxed out, or do you have ample available credit at your disposal? How much matters.
What percentage of available credit are you currently using?
Recent Credit Inquiries
It's okay for your credit to be checked every once in a while, but frequent inquiries can hurt your score.
New Credit Accounts
Newer credit accounts hurt your average credit age, and can bring down your score.
Shopping for a home before getting pre-approved for a mortgage is the equivalent of walking into a grocery store without a wallet. Yet, the vast majority of homebuyers don't get a loan pre-approval for the house hunt.
Buyers Avoid Boredom
Buyers often are eager to start looking at homes and tend to leave what they view as the boring, bureaucratic part of the homebuying process for last. This is the wrong way to do it.
Any serious buyer should pursue a pre-approval from a lender in advance to beginning a home search.
But real estate and loan professionals say it's common to come across buyers who skip the pre-approval process.
It happens every day," says Patty Da Silva, a real estate agent and owner of Green Realty Properties in Davie, Florida. "I can't believe I still get offers today without a pre-approval."
As with many other agents and sellers, Da Silva says she rejects offers from buyers who don't have pre-approval letters from their banks.
"You have to have a pre-approval and it must be a real pre-approval where the lender has verified not just your credit, but bank statements, tax returns -- and I call the lender to verify that," she says.
What Is A Pre-Approval?
A pre-approval is different from a pre-qualification. With a pre-qualification, the lender relies on information provided by the buyer to estimate how much the borrower could qualify for. With a pre-approval, the lender verifies the borrower's information and documentation to determine exactly how much it would be willing to lend to that borrower.
The documents to get pre-approved are the same documents that you would need to get a mortgage.
Documents you likely will send:
30 Days of Pay stubs
Last 2 years' W-2s
Last 2 federal tax returns (business owners will need the business returns.)
Two months' worth of bank statements for each account listed on the application
A pre-approval is not a loan commitment, but it helps speed up the underwriting and loan approval process.
Don't Be Afraid To Face Your Loan Reality
Some buyers put off the loan application out of fear a lender may not approve them for the amount they plan to spend to buy the house.
It's like when people don't go to the doctor for their annual checkup when they are afraid to find out what's wrong with them. That's the same thing with getting pre-approved.
Others simply don't want to share an abundance of private information with a lender until they actually find the home they want.
Your friend or family can't approve your loan
It's typical for potential buyers to assume they qualify for a certain mortgage amount based on what a neighbor, friend or relative with a similar credit profile bought.
A survey by NeighborWorks America found that nearly 4 in 10 people who are thinking of buying a home first seek advice from friends and family who own a home. Only 16% say they approach a real estate agent for advice in that early stage, and mortgage lenders are approached only 9% of the time, according to the survey.
Even if you pay your bills on time and earn about the same as the friend who just got that $300,000 mortgage, don't assume you qualify for the same loan. It's highly likely that your credit score or overall debt to loan ratios are different than that friend. These can affect one's ability to qualify.
Getting pre-approved before you shop for a loan also allows buyers time to fix unexpected errors on their credit reports. Many people have errors on their credit report that is not known until it is too late to correct. You need to have time to fix that if you happen to be one of them.
When you find the house that you want, that is not when you then try to get pre-approved. If somebody else has it, there's no way the seller is going to wait to look at your offer once you get the pre-approval.
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