In many markets across the country, the number of buyers searching for their dream homes greatly outnumbers the amount of homes for sale. This has led to a competitive marketplace where buyers often need to stand out. One way to show you are serious about buying your dream home is to get pre-qualified or pre-approved for a mortgage before starting your search.
Even if you are in a market that is not as competitive, knowing your budget will give you the confidence of knowing if your dream home is within your reach.
Freddie Mac lays out the advantages of pre-approval in the My Home section of their website:
“It’s highly recommended that you work with your lender to get pre-approved before you begin house hunting. Pre-approval will tell you how much home you can afford and can help you move faster, and with greater confidence, in competitive markets.”
One of the many advantages of working with a local real estate professional is that many have relationships with lenders who will be able to help you with this process. Once you have selected a lender, you will need to fill out their loan application and provide them with important information regarding “your credit, debt, work history, down payment and residential history.”
Freddie Mac describes the 4 Cs that help determine the amount you will be qualified to borrow:
- Capacity: Your current and future ability to make your payments
- Capital or cash reserves: The money, savings, and investments you have that can be sold quickly for cash
- Collateral: The home, or type of home, that you would like to purchase
- Credit: Your history of paying bills and other debts on time
Getting pre-approved is one of many steps that will show home sellers that you are serious about buying, and it often helps speed up the process once your offer has been accepted. In the competitive market today with more buyers than homes for sale, many sellers will not even consider an offer without either pre-approval from a lender or the ability to prove you have the cash on hand to buy.
There are a variety of loan products available to fit everyone from the first-time buyer with limited capital or cash reserves to invest up front to the more financially established buyer who can invest more up front for lower interest rates and better terms. Some lenders have programs that are much easier for self-employed persons to get, compared to traditional banks. A professional REALTOR® can steer you toward lenders who offer products most favorable to your situation and review loan offers to help you determine which is most advantageous to you.
Many lenders are now doing up-front credit underwriting. This means that potential buyers can have the entire individual credit review process done first. Once it's complete the buyer knows they have qualified for a mortgage of a given amount and all that remains is to 1.Locate a home in that price range and have an offer accepted then 2. Have the lender complete the property appraisal to verify that the property has sufficient value to act as collateral for the loan! If the buyer has already completed the underwriting process, the time needed from contract acceptance to closing is reduced.
Many potential home buyers overestimate the down payment and credit scores needed to qualify for a mortgage today. If you are ready and willing to buy, you may be pleasantly surprised at your ability to do so as well. And getting a pre-approve (preferably with underwriting done up front) can reduce your stress, speed up the process and make your offer more attractive to the seller!