The dream of buying your own home is basic human nature. We all crave the sense of belonging that comes from having our own place to build a future for both ourselves, and our family.
Dreaming is one thing. Being ready to buy a home is so much more than reaching the point where your calculations add up and your decision is made.
You are ready only when you have your pre-approval for a mortgage in hand.
Pre-Approval - what you need to know
Being pre-approved by lenders is different from your own calculations. It is also different than being pre-qualified by lenders. Pre-qualification is an estimate of what you can afford based on your income, and can be done instantly over the internet or phone. It gives you a rough idea, but is not enough to get the process formally started. A pre-qualification process does not take your credit history into account, which is a crucial factor in obtaining a mortgage. It is, however, an essential part of the process, as it gives you an idea of what you are getting yourself into. This is an extension of your own calculation in getting to the decision of whether or not you are ready to buy. Pre-approval is a concrete go-ahead. It shows sellers that you are not only serious, but also able to obtain a mortgage. It is a complete appraisal of your credit history, credit score, as well as your ratio of debt to income. Typically, a ratio of 36% or less of credit to income is required by lenders for approval. This is an in-depth analysis of whether you are really able to repay a mortgage and what you can afford. It is a token of intent and is generally valid for 60 - 90 days.
While not the formal loan application, pre-approval speeds up the process of obtaining the final loan. Most importantly, it is a requisite for any realtor and seller before they will even consider you as a buyer.
What you will need
The first step is to decide on a lender. While you are allowed to approach more than one lender at a time, remember that each credit check impacts your credit score temporarily. Try not to approach too many. 1 - 3 should be enough for a good estimation.
Once you have decided on a lender, you will need to have the following ready for evaluation:
Proof of all income for the previous 2 years, including wages, bonuses, commissions, etc.
W-2 wage statements for 2 years
Proof of all assets, such as bank statements, investment account statements, etc.
Your last two income tax returns
Proof of ID, as your social security and income numbers are needed for a full credit history check
If self-employed, any and all documents proving income and stability are needed. This is generally a more complex analysis for being a higher risk.
Some advice for success
Besides the obvious factors, such as credit history and a stable source of income, the following will also boost your chances of success.
Get your down payment together
Although there are programs that allow down payments as low as 3.5%, the ideal will always be 20%. The closer you can get to this, the better you are rated by lenders. If not at 20%, be ready with your minimum, as this will be an important factor in approval.
Keep your spending low
Being pre-approved does not guarantee final approval of a loan.
Spending and taking on more debt in the period of pre-approval will affect your income to debt ratio and could cause you to be turned down for the final loan. Pushing your expenditure and debt up shows that you are at high risk and not ready to take on the responsibility of a mortgage.
Finally, buying your own home is worth all the extra effort and complexities. Stop dreaming and take the first step in making this journey a reality by getting in touch with one of our qualified lenders for pre-approval.