As you probably already know, most first-time home buyers don’t purchase their home with a suitcase full of cash. They borrow a large percentage of the money (usually anywhere from 80% to 100%) required to purchase the home, and agree to pay it back with interest over a number of years (typically 30).
The bank, in exchange for loaning the money, makes a pretty good return on the interest on the loan, and gets a lien on the house (meaning if you ever sell it, they get paid first; and if you ever stop paying, they can foreclose, take your house, and sell it to get their money back).
As you may have already guessed, there are several steps that all first-time home buyers usually go through to get a mortgage, and there are different types of lenders, and different types of loans, for you to consider. The rest of this chapter focuses on these options.
Pre-Qualification versus Pre-Approval
Most lenders offer two levels of screening for determining how much of a mortgage you qualify for: a pre-qualification and pre-approval.
Pre-Qualification – Pre-qualification is generally less intense and typically involves you simply telling the lender how much you earn, how much you owe on various debts, and how much you are obligated to pay out every month on things like car payments and utilities. Often you can even submit this information online and get an instant response like: “Congratulations! You’re pre-qualified for a mortgage up to $350,000.”
While this can be useful for you to get an idea of how much of a mortgage you can afford, it really doesn’t carry much weight with anyone else. REALTORS® and sellers want something that’s more meaningful.
Pre-Approval – A pre-approval usually involves submitting pay stubs, tax returns, and other documentation, and having the lender pull your credit report. By doing so, the lender can make a much more accurate determination of your credit score, debt-to-income ratio, and other factors that determine how much of a mortgage loan you actually qualify for.
After doing so, your lender will issue you a letter stating that they have done this due diligence and that you qualify for a mortgage from them for up to a certain amount. Your real estate agent may want to see this letter, and perhaps even speak with your lender, before showing you homes and submitting offers for you, and most savvy listing agents and home sellers will ask for your pre-approval letter to be submitted when you make an offer on a home.
Rob Reed is a REALTOR in St Petersburg, FL that specializes in working with first time home buyers.
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