The first step in your new home search really begins with lender pre-qualification. In the pre-qualification process, you will discover your credit worthiness and well as a preliminary budget amount. From here you can determine if you are ready to begin your new home search or if you need to take more time before beginning the process.
How much can you afford?
In the pre-qualification process, the lender will get a broad overview of your financial situation. They will look at your income, debt and liabilities to determine a budget for your new home based on a likely debt to income ratio and the strength of your credit.
“Generally speaking, most prospective homeowners can afford to mortgage a property that costs between 2 and 2.5 times their gross income. Under this formula, a person earning $100,000 per year can afford to mortgage between $200,000 and $250,000. But this calculation is only a general guideline.” Mortgages: How Much Can You Afford? | Investopedia
The pre-qualification process is not the step that puts you into any type of contract, rather, it is simply information. In the pre-qualification stage, you can begin to look online for homes in your budget range and see if they match your expectations. If not, you may want to talk to the lender about the ways in which you can increase your budget. It could be putting more money down, looking in a different area, increasing your income or cleaning up your credit report.
Clean up your credit
Just like spring cleaning or regular oil changes, your credit report needs some TLC. Even if you already have good credit, inaccuracies could cost you over the long run. Start by getting your free credit report at AnnualCreditReport.com. Look at every account listed and make sure it is yours. Sometimes a clerical error will put someone else on your report. Also, some creditors have a different name than you recognize. A quick call can usually clear this up.
Dispute any incorrect information using the credit bureau’s forms. You may also follow up directly with the creditor to have it removed. For a longer term solution, you may consider a free tool called Credit Karma, which can help with building your credit with offers and additional tips.
The second step of the mortgage process is pre-approval, which then allows you to go shopping for a home. There is a big difference between pre-qualification and pre-approval. If you have decided that you are ready to move forward in your new home search, you will want the pre-approval to put yourself in a stronger buying position than without it. In order to do this, you will want to choose a lender, and there are a huge variety of lenders to choose from.
Mortgage brokers tend to offer the best in customer service as they are individuals responsible for their own income. In essence, they are small business owners backed by funds. They also have the highest closing rates. Banks also offer mortgage but it isn’t always personalized or quick. They also can be limited to products that they carry or have access to. This isn’t always bad, but it can limit offers that allow for special situations. There are also online lenders, but with these, I say, buyer beware. Many times you don’t have one point of contact, and while they say their rates are the lowest, money is tacked on in interesting ways.
I am happy to introduce you to several lenders I have worked with successfully who provide high quality customer service and great rates for a variety of personal situations.