One of the most common mistakes first-time home buyers can make when shopping for a house is to enter into the process without an understanding of how much home they can afford. Seeking pre-approval not only keeps you from wasting time looking at homes outside your price range, but can keep you from the disappointment of finding a home you truly want, only to find you can’t afford it.
Instead, you can limit your search to homes and neighborhoods within your means. In addition, once you are ready to put in an offer on a home, sellers will take you more seriously and often give your offer priority over similar terms without pre approval.
Having loan pre-approval allows you to act more quickly and gives you an edge in negotiations.
Plus, once you have been preapproved for a loan, you then have a base from which to do a bit of window shopping for loan options open to you.
Here are three tips to make first time home buyer pre approval go more smoothly:
Unlike pre-qualifying, which simply relies on your best estimates about your financial situation, the more involved process of preapproval requires you to provide the prospective lender with documents that will be used to verify your financial and employment situation. These documents are required of both you and your co-borrower, if applicable. Ensuring you have these documents available at the start can help to speed up the preapproval process.
It varies, but typically the loan officer will ask for the following:
If you are self-employed, the process can be a bit more challenging. In place of your wage statements, you will be asked to provide:
During the preapproval process, the loan officer will pull a copy of your credit report to look for any red flags, such as late payments, charge offs and reckless use of credit. A surprising number of people have errors on their credit report, however, so it pays to get a copy of your credit report (and that of your co-borrower, if applicable) and ensure all the information is accurate before speaking with a lender. Each of the three big credit bureaus—TransUnion, Experian and Equifax—have information available on their websites explaining how to correct a mistake or dispute information in a report generated by them. You can request one free copy of your credit report each year without incurring a cost. The official site for doing so is annualcreditreport.com.
While you may find it difficult to do much about your income level, you may be able to do something to decrease your debt. Your lender will be analyzing your overall debt, including minimum credit card payments, student loan payments, and car payments, to come up with your overall debt-to-income ratio. Decrease your overall debt by paying down credit cards and loans prior to the preapproval process.
Preapproval does not guarantee you will receive a loan. Once your offer is accepted on a property, the home will need to be appraised and your lender will need to formally approve your loan if all qualifications are met. But first time home buyer pre approval does bring you much closer to final loan approval and offers significant advantages in the home-buying process.