You will not want troubles, hurdles, and complications when buying a house because it is one of the biggest investments you will make. The last thing you need is to know you are ineligible for a mortgage or that the house you want to buy exceeds the loan amount you are eligible for.
To avoid this, instead of beginning your home-buying process by searching for a property, how about doing a rehearsal of obtaining a mortgage to finance your property? Doing so will answer a lot of questions you are looking for.
In the real estate industry, the rehearsal of securing a mortgage is called prequalification and preapproval. Going through these processes will help you understand whether you meet the general requirements for a mortgage.
So, if you are concerned about your transaction history, like debt-to-income ratio and credit score not being good enough, here is how prequalification and preapproval help you out.
Key Takeaways
- Pre Qualification tells you about your mortgage eligibility.
- The process of pre-qualification does not include document verification.
- Pre-approval process takes longer to complete.
- Lenders use the credit score to decide whether to preapprove you for a mortgage or not.
- A low debt-to-income ratio means getting the loan at favorable terms.
What Does Prequalification Offer?
Mortgage prequalification is usually the starting point when you decide to buy a house. This is where the lenders ask about your financial standings and see if you meet the criteria needed to obtain a loan.
The lenders would be interested to know your debt-to-income ratio, credit score, transaction history, and more. During the mortgage prequalification process, you don’t have to prove the claims you have made about your financial position.
For now, the lender is that friend who trusts you. With no verification of documents, the prequalification process takes significantly less time.
But because of your friendship with the lender and no document verification, the estimated loan amount preapproved for might not be very accurate.
You might also want to know, “What happens to my credit score during the prequalification process?” For the time, when the lender accesses your credit history, it will not be for lending purposes. This means your credit score will not decrease.
What’s Special in Preapproval?
If you want a more accurate loan amount estimate for which you are eligible, the preapproval process is for you. This is where the lenders turn from being your friends to becoming hard taskmasters.
You will need to verify the claims you made during prequalification to know your loan eligibility. Make sure your documents are official and valid. Some of the documents that can help you prove your claims include:
Social Security Card or Driving License
For the lenders to confirm your identity and know you are who you claim to be.
Bank Statement
To know about your income sources and debt-to-income ratio.
Credit Report
Understanding if your financial history is clean or if you have a history of missed payments, loan defaults, or home foreclosures?
Did You Know
Accessing your credit report for preapproval is a hard inquiry, which can temporarily decrease your credit score.
W-2 Form
How much are you earning from your employer, and how much tax are you paying? That is what the W-2 form tells the lender.
Importance of Credit Score?
The credit score is a numeric representation to evaluate your loan borrowing eligibility. This score illustrates your history of paying back your debts on time.
Your credit score is determined through the data from your credit report. We have already discussed that the credit report is where your financial activities are recorded.
Generally, credit scores are used to assess the risk while lenders provide the loan. This is usually the indicator which helps lenders decide the interest rates and other loan terms. A high credit score can ensure favorable loan borrowing terms.
Credit Score to Be Preapproved
As important as it is, there is nothing specific to make you say, “I have a good credit score.” There can be different credit score requirements for the lender you are dealing with or the loan you are thinking of applying for.
But generally, when going for a conventional loan, having a credit score of over 620 should be good enough. This is eased up when you go for government-backed loans. You can get a preapproval letter for a credit score of over 500.
Ways to Improve Your Credit Score
If you think your credit score is not good enough, here are some ideas to make it better.
Long Credit History
A lengthy credit history is good for your credit score. That is why we recommend keeping your old accounts open.
On Time Debt Repayments
One of the biggest factors that can help you grow your credit score is making on-time repayments of debt. This includes your loans, Texas, credit card payments, and more.
Diversifying Your Credit
Having different types of credit, like loans, mortgages, and credit cards, can grow your credit score. But make sure you don’t open too many credit accounts just for the sake of diversifying.
Importance of Debt-to-Income Ratio
How much are you earning every month, and what is the debt you need to pay from those earnings? That is what the debt-to-income ratio illustrates. This is important for the lenders to know so they can understand your mortgage affordability.
Here’s the formula to calculate the debt-to-income ratio.
Total monthly dept
Gross monthly income
Lenders use the debt-to-income ratio as a way to assess the risk of providing the loan as well and decide on the loan terms.
Debt-to-Income Ratio to Be Preapproved
The definition of a “Good enough Debt-to-income” rate can vary from lender to lender and the type of loan you are thinking of going for. Having said that, the general debt-to-income ratio that is normally good enough for most lenders is having it below 40%
Ways to Improve Your Debt-to-Income Ratio
If your debt and ratio are less and it might impact your mortgage preapproval, here is how you can improve it.
Add Sources of Income
One way to increase your gross income and lower the debt-to-income ratio is to have additional sources of income.
Cut Down on Discretional Spending
Reducing expenses, which can be avoided, frees up your budget to pay to repay your debts faster.
Avoid Taking New Debts
Instead of increasing your list of debts, we suggest focusing on the ones you already have.
The Bottom Line
You now understand how important it is to maintain a high credit score and low debt-to-income ratio for mortgage prequalification and preapproval.
If you have questions about making profitable real estate investments, contact the experienced agents at HAR.
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The content in this article or posting has been generated by technology known as Artificial Intelligence or “AI”. Therefore, please note that the information provided may not be error-free or up to date. We recommend that you independently verify the content and consult with professionals for specific advice and for further information. You should not rely on the content for critical decision-making, as professional advice, or for any legal purposes or use. HAR.com disclaims any responsibility or liability for your use or interpretation of the content provided.
