This secret can make negotiating your contract so much easier

Bethany RamosCredit Score, First-Time Homebuyer, Getting Prequalified, Home Buying

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Jan. 25, 2019.

Shopping for a house is the fun part — which is why most of us forget how important it is to do our prep work way before we start browsing online. While meeting with a lender, filling out paperwork, and making sure you prequalify for a home loan may not be as exciting as going to a showing, it’s something that can save you from the heartbreak of having your dream home snatched out from under you.

What does prequalifying have to do with buying a house?

As most lenders and realtors will tell you, prequalification is an important first step in the home financing process. You can think of it like creating a financial snapshot that anyone can look at when you’re buying a house. To get you prequalified, a mortgage lending team will review your income, debts, and assets. You’ll also get to talk about your goals and the loan programs available to you.

In short, there are three big reasons why you’ll want to find out if you’re prequalified — before you consider placing an offer:

1. Know how much you can afford.

first home buyer
Considering the investment you’re about to make, this is one time you don’t want to throw your seeds into the wind. Meaning, prequalifying can save you time and effort when you’re shopping for a home. “Get prequalified before looking,” Kim Crieger Goodwin, an Oregon realtor at Crieger Goodwin Real Estate Sales, says. “I know this point is brought up frequently, but it is the most important part of buying a home. You wouldn’t believe how many people start shopping first, and then check their qualifications after finding the home of their dreams — often a recipe for disappointment.”

When you get prequalified before house-hunting:

  • You’ll know the exact loan amount that you qualify for so that you can narrow down homes within that bracket.
  • With these numbers, you can start budgeting for your monthly mortgage payments and setting aside extra cash for closing day.

2. Move to the head of the class.

first home buyer
For most buyers, this is one of the biggest advantages. If ever you find yourself in the midst of a bidding war (where the likelihood is high as our housing market is heating up again), you’ll have an ace up your sleeve. A seller will be more likely to choose a buyer who is serious, and you can prove you’re serious and ready to buy by showing that you’re prequalified for a loan. “Sellers want immediate assurance that a buyer can perform,” Crieger Goodwin says.

Not getting prequalified first can often slow the offer process:

  • Crieger Goodwin says that in her market, sellers expect a prequal letter with every offer.
  • Without this assurance, you could lose out to a competing, prequalified buyer.

3. Stop problems before they start.

first home buyer
Bad credit, missing paperwork, low funds, and anything else that may come out of left field can be taken care of before you decide on a house. Prequalifying will give you time to work through any and all issues with your mortgage lender in advance. You may even be able to close faster once all your financials are in order.

As numbers are crunched during prequalification, Alan Guinn, CEO of The Guinn Consultancy Group, Inc., recommends considering other household expenses that may affect how much you can afford to buy. Too often Guinn says he sees buyers, especially first-time buyers, spending too much on their first house. “You want to have some spendable income to buy clothes, and food, and tires for the car — and maybe even a newer used car — somewhere down the line,” he says. “If you take every single dollar and budget it out for a house payment, you’re going to find that other payments tend to get left behind. If you’ve budgeted every dollar into the house payment, how do you intend to buy what you need?”

Your mortgage lender can help you troubleshoot during the prequalification process, but there are a few steps you can take to prevent potential pitfalls that can delay closing.

Katie Ross, Education and Development Manager of American Consumer Credit Counseling, a national financial education nonprofit, recommends buyers:

  • Take a First-Time Homebuyer course. “This will give you invaluable information regarding the homebuying process. The course includes topics such as what goes into eligibility, down payment, closing costs, and qualifying information. It also covers credit and how to build and improve credit,” Ross says. You can ask your lender for more information on homebuyer education in your area. In some cases, a homeownership course may be a requirement to qualify for a specific loan type, like some low down payment Freddie Mac home loans geared toward first-time buyers.
  • Get your finances in order. Taking a personal inventory can give you a strong understanding of where you stand financially. “Will you be able to put a down payment down? If so, how much?” Ross says. While lenders once required a 20 percent down payment, there are now multiple first-time homebuyer programs with little to no down payment
  • Pull your credit report and check for any inaccuracies. Then, work on getting your credit in order. “This should be addressed 9 to 12 months ahead of prequalification,” Ross advises. Reviewing your credit can also help you determine if you need to pay off or against your current debt.

There’s a better way to mortgage (and a free app that can help you close fast). Get started here.

5 documents you’ll need to get prequalified for a home loan

first home buyer

Giving your mortgage lender a little financial history can help you to prequalify. You’ll need your:

  1. Most recent W2s over the past two years.
  2. Most recent checking and savings account statements over the past three months.
  3. Most recent quarterly (or three months’ worth) statements for money market, mutual funds, stock, or 401(k) accounts.
  4. Current pay stubs for the past 30 days.
  5. Current landlord and/or mortgage company names and phone numbers.

**By furnishing any and/or all of the documentation, an applicant is in no way obligated to accept the terms and conditions of the mortgage offered, nor does the borrower have to provide these documents to receive a Loan Estimate.

You’ve probably heard that buying a home can be one of life’s most stressful hurdles, which is why we aim to hit as close to the mark as we can. Prequalifying can make a big difference in getting into a new home quickly, but Cornerstone Home Lending can do you one better. We’ll strive to get your loan fully underwritten before contract (subject to Underwriting approval of the appraisal) — something not all lenders are willing to do. When there are multiple offers on the table, this gives you even more sway in your bid.

For educational purposes only. Please contact a qualified professional for specific guidance.

Sources are deemed reliable but not guaranteed.

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