Buying a new house is likely to be the most expensive purchase of your life to date. After all, the median selling price for a new house in the United States is nearly $400,000. Numbers that high are unchartered territory for most. So how do you know which house you can afford, and which is out of your budget?
The first step in financing a house is to prequalify for a home mortgage. This simple process can go a long way in helping you hone in on the house of your dreams, make your offer appealing to sellers and avoid any transaction complications down the road.
Here’s everything you need to know about mortgage prequalification.
How Does Qualifying for a Mortgage Work?
Mortgage prequalification is an early step in determining how much money a potential homebuyer can spend on a new house. During the process, a financial institution will review an applicant’s pertinent financial information, including credit, income and assets, and issue a prequalification letter. This document states that the lender is tentatively agreeing to loan the homebuyer a certain amount of money in order to purchase the property. It is not a guarantee.
The primary benefits of being prequalified for a mortgage are twofold: It provides a ballpark budget for those looking for a new home and ensures sellers that a buyer will likely be able to secure financing. It’s not uncommon for sellers to require a prequalification letter before accepting an offer.
What Are the Different Types of Mortgage Prequalification?
All prequalification letters are not created equal. Some provide just the basics, telling the loan officer how much money the potential homebuyer makes and how much they are looking to put down. This is great if you just want a ballpark figure to work on your budget. However, without any of your assets and income being verified, the letter is often not worth much when you go shopping for a home with a realtor.
If you want to have a letter that removes obstacles and makes it easier on you when you find a home, you will have to put a bit mote time and effort put into becoming prequalified. The next step up could be providing the loan officer with documentation of your income and assets and then to pull what is known as a soft inquiry into your credit profile. The soft inquiry is often free to the consumer and will not impact their credit score. The downside to this is the credit pull can’t be used to underwrite the loan. However, with these elements in tow, the loan officer can then provide a prequalification letter that has some teeth to it. They would be able to review all the documents to ensure there are no red flags for underwriting.
If there are legitimate concerns about qualifying for a home loan, then the borrower should consider a prequalification letter with a hard credit pull. This pull will affect the borrower’s credit score and it usually requires a small upfront payment. However, this is the same type of report that will be pulled when you finally find a property and are ready for your loan to be underwritten. The same type of documentation will be collected for income and asset verification, and you will be able to have a prequalification letter that carries a lot of weight because this type of process mimics the actual loan process.
How Do You Prequalify for a Mortgage?
Getting started with mortgage prequalification process couldn’t be any easier. In many cases, it can even be done from the comfort of your own home. With AAA, for example, you can simply fill out a quick-and-easy online questionnaire. Your information is then forwarded on to a mortgage specialist who will contact you to gather any other necessary information.
When you prequalify for a home mortgage you ensure that the homebuying process goes as smoothly as possible.
Looking to buy a new house? Start the journey today by getting prequalified for a mortgage from AAA.