THE PROCESS OF PREQUALIFYING

Yes! You found it! The dream home you see yourself living in for the best years of your life! Where do you sign?

Not just yet!

The everchanging world of real estate can turn into a nightmarish rabbit hole if you don’t equip yourself with the right tools to navigate it. After finally deciding to buy my first property, I called many property agents to schedule a showing of the properties I was interested the most only to find myself in a very common predicament as a first-time buyer… No agent will want to show you a property if you haven't gone through the process of prequalifying. The next step into buying a home is to contact a lender and get prequalified for a mortgage loan.

Prequalifying for a Loan

“No agent will want to show you a property if you haven't gone through the process of prequalifying.”

First thing to consider in this next step is your credit score. The higher your credit score is, the better loan deals you’ll get. It’s no joke when you hear from other people that have gone through this process already that your credit score plays a big role in getting the best offers when it comes to loans. For example, I have a friend of mine who got a mortgage loan with a credit score a little over the 650’s. Her loan ended up having an interest rate of .75% over the average interest rate in the market at the time. Now, some of you may think the difference isn’t much but, after calculating the difference in her loan, she’ll end up paying around 59K more on interest payments throughout 30 years only because her credit score wasn’t higher. This is not to say that you can’t qualify for a mortgage loan if you have a lower credit score than 650. There are different kind of loans you can apply for based on what you need and where you stand financially. For example, the minimum credit score needed to qualify for an FHA loan is 500, but there are other things to consider in this type of loan since the credit score is very low. I’ll be covering this in the differences between loans post but for now know that having a good or excellent credit score truly helps getting the best deals out there.

I found whenever I was interested in buying a property and called for more information, the first thing anyone asked was if I had been prequalified already. This is a simple easy step which is basically one call/click away. As soon as you get in contact with a bank or mortgage house, they will ask for the required documents. These documents differ a little, depending on the bank or mortgage house you use, but not by much. They will do a background check on you in order to let you know how much you qualify for to buy a property. This should be your next step as any realtor who is either representing you or representing the seller will ask you for this letter. It may take just a couple of hours to get this pre-qualification letter from the bank, or it could take a little bit longer but, knowing how fast paced the market is right now, most of them try to have it ready for you by the end of the day.

Another thing to consider is how much cash can you put down on a home purchase. When you decide to buy a property, the lender will automatically ask you how much down payment will you be bringing to the table. A down payment is basically an amount of money you will be paying upfront to purchase the property you want. While this money will not be coming out of your checking account when you prequalify, you will be paying this amount along with your closing costs at the end of the purchase process. The amount usually given as down payment ranges between 3 and 20 percent of the purchase price of your dream home, depending on the lender requirements and the amount of cash you have on hand, but you can also give more if you wish. The higher the down payment, the lower your monthly mortgage payment will be. This also influences the deals you will get when you prequalify for a mortgage loan. The higher amount of money you can pay upfront… the higher your price range will be to purchase a property.

When you prequalify for a mortgage loan, you are basically allowing a lender to do a simple credit check to determine your eligibility and price range. It is important to know that the lender usually doesn’t have to pull your credit for this unless you want to make it official. They provide a document that states you are pre-approved to apply for a loan and an estimate in writing of how much you can afford when buying a property. Keep in mind, this is only an offer and is not necessarily an approved loan. This document shows the seller how committed you are in this process.

There are several ways to prequalify for a mortgage loan. One option is to schedule an appointment to meet with a mortgage agent at your preferred financial institution, another way is to apply by phone, or you can also submit an online application through a lender website to get prequalified for a mortgage loan. Most lenders require information of your monthly debt amount and documents like check stubs, ID, and bank statements to provide this estimate. This document usually lasts around 45 to 90 days depending on the lender and, once it expires, you would need to go through the whole process again. So, my recommendation to you is to ask your lender about this so that you can keep this date in mind once you start going through this whole process. It should take the lender anywhere between 12 to 24 hours to provide you with this letter. In this fast-paced market… the sooner you get it, the better!

Last but not least… prequalifying is not the same as applying for a loan. You can get pre-qualified to buy a home, but that doesn’t mean your mortgage loan is already locked in with whoever did your pre-qualifying process. The lender does a more through credit check when you decide to formally apply for a loan in which they do pull your credit and it counts as a hard inquiry on your credit score. It is important to know that, once you decide to formally apply for a loan, you have options as to who your lender will be. I will be talking more about this in a separate post!

Feel free to subscribe so you can get notified when I update this blog. In the next post, I will take you through the steps following the prequalifying process in which I will discuss what are the benefits of working with a licensed agent, also known as a realtor!

Disclaimer: I'm merely expressing my experience in this blog as a way of helping others understand part of the process of buying a property.