After making the decision to buy the house, there will be a lot of thoughts running in your mind. You would want the home-buying process to go smoothly and hurdle-free.
But if you start looking for properties without knowing the loan amount or mortgage types you are eligible for, you might encounter a series of hurdles. The house that you have shortlisted after much time thinking about may exceed the mortgage amount you are eligible for.
One of the most common ways to avoid stumbling onto those hurdles is to reach out to lenders and check your eligibility for mortgage amounts and types. That is what you get with mortgage prequalification and preapproval.
You will have lenders review your financial standings and provide an estimated mortgage amount, along with loan types for which you are eligible.
So, how do the processes work? And how can you improve your chances for high eligibility? That is what we will talk about.
Let's start.
Before evaluating the mortgage amount and the loan type you are eligible for, let's take it back a bit. Ask yourself the question, "Am I eligible for a mortgage in the first place?" That is an answer you will get from mortgage prequalification.
Here, the lender evaluates whether you meet the basic criteria to secure a loan amount. The lender would want to know basic information about your financial position. Some of these questions might be about your
Mortgage prequalification does not take a long time to complete. That is because the information is not verified. So, the lender assumes your information is correct.
You might get the advantage of time with prequalification, but there is a trade-off. The loan amount you get with prequalification might not be too accurate. That is because the estimated mortgage amount is based on unverified information.
Since the prequalification does not give you an accurate loan amount that you can borrow, home buyers go for obtaining a preapproval letter. In this process, the lenders need proof of the claims that you are making. You can use recent and valid documents to prove your claims.
Some of the documents that lenders might want to see include
Since the lenders have to evaluate the documents you provide, preapproval takes a longer time compared to prequalification. But if you want a more accurate estimate for the mortgage amount you can secure, the wait will be worth it.
Yes. We have mentioned the credit report as one of the documents the lender would want to see. That is because your credit report reveals if you have a history of financial fraud, like late payments and defaults.
Since your lender steps in to access your credit report, this is a hard inquiry that can reduce your credit score. But this will not be permanent. Your credit score will be back soon after the process is complete.
There is a long list of mortgage types that you can explore to get preapproved. There are generally two types of loans. Let's talk about them.
These loans are offered by government organizations. So, there is not much risk for the lender as conventional mortgages. Here are some commonly used government-backed loans and what they may require for preapproval.
One of the biggest attractions of the FHA loan is that it is more affordable for homeowners. You can expect easy terms like smaller down payments and lower credit scores required.
In order to get preapproved for the FHA loan, here is what you may need to prove.
This mortgage type of for active duty, past service members, and serving spouses. Among the multiple benefits that VA loans offer, the top ones are that you get competitive interest rates on your loan and no down payments are required.
Here are some requirements to get preapproved for a VA loan.
These are the more common loans by private lenders since they don't have specific eligibility. As lenders take a higher risk by offering conventional loans, you might see stricter requirements.
Here are some of the factors that lenders may want to verify
Here are some of the conventional mortgages you can get pre-approved for.
Now, let's talk about the most major part of a mortgage loan, how much mortgage amount you will get.
Remember, the lenders will be weary about your ability to repay on time. To mitigate their risk and determine your mortgage affordability, the lender reviews your:
These are just some of the factors that can help you understand the mortgage amount you can borrow and budget for a new house.
You might think, "I am not happy with the current mortgage amount I am preapproved for. Can how can I improve it?" You sure can.
Here are some ideas for ensuring you grow the mortgage amount that you are pre-approved for.
Having a long and successful credit history creates trust in the lender that you will be able to make on-time payments.
The debt-to-income ratio tells the lenders how much money you will have available for the mortgage. Ideally, you would want to keep it below 45%. To do so, make sure to cut out avoidable expenses.
Showing that you have multiple income streams and a consistent employment history is a message to the lender that you will be able to repay the loan amount.
It is more than just paying back the mortgage amount. You need to back on-time loan repayments. To increase the trust with your lender, make sure your credit does not have regular late payments.
Having the preapproval letter makes it easier to not only obtain a mortgage but to have the desired loan types and mortgage amount. Now, you can buy your preferred property. How about starting your search from HAR.com?
We have a large number of houses listed on our platform. Find the one you like.
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