The housing market has recovered from many of its recent woes, so you might be thinking about jumping in and finding the house of your dreams. But whether you see yourself living in a classic center-hall Colonial or something a bit more contemporary (and regardless of whether you want to buy a condo that costs $125,000 or a sprawling piece of property for $899,000), the process to home ownership always starts with getting preapproved for a mortgage.
A mortgage preapproval is important not only to buyers, but sellers as well. For sellers, it provides written confirmation that a potential buyer has qualified for a loan based upon their credit history and income. And since buyers are preapproved for a loan of a specific amount, it allows them to narrow their search to properties at or beneath that specific amount. (Meaning they won’t fall in love with a house that’s way beyond their purse strings.)
Ultimately, it can also expedite the process, too, since it demonstrates that buyers are serious about making a purchase and also drastically reduces the risk that they’ll be turned down for the actual loan.
If you’re looking to receive preapproval, here’s what you should do:
Check your credit score.
Your credit history is the single largest factor as to whether or not you are preapproved. Check your credit score and if it’s low, work to improve it by making on-time payments and reducing your debt-to-credit ratio (that’s how much debt you have in relation to your total available credit) by reducing your outstanding balances and also avoiding any additional debt for the time being.
Shop around for a lender.
In order to get the best interest rate, you should get quotes from several lenders. Experts recommend contacting a couple of banks and also a mortgage broker (who will also look at quotes from additional lenders) before deciding which one to get preapproval from. Be sure to not only compare interest rates, but also accompanying fees, which can vary among lenders.
Organize your paperwork.
To be preapproved, a lender will require you to submit a stack of paper that documents your financial history. They will scour the details to figure if you can pay for a mortgage, and if so, calculate how much you can actually afford. Among the items you’ll be asked for:
- Tax returns
- W-2 tax forms
- Bank statements for your checking and savings accounts
- Statements for investment and retirement accounts, including 401(k)s, IRAs and any stocks, mutual funds or bonds you own
While all of this may sound like a headache, you’ll be thankful you did it. Especially once you sign a contract on your new digs.