Why do I need to pre-qualify for a loan?                                                          << Back

There are many questions that you have to answer to yourself before you go on a home buying adventure. In my profession, I have seen many buyers who start to look for a home, they think they can afford. Educating them is a challenge as not many people appreciate the way it sounds! I mean, LITERALLY!

I have had my clients say to me that they know better about their finances than I do. Of course, they do! Often times, based on our idea about the market, we estimate what we can afford. I have seen many contracts, some put by me and some put by my other fellow Realtors®, fall through because the lender did not qualify the buyer when they applied for a loan. I hate to see my clients loose the home they liked so much just because they could not afford it. This is the ugly situation that I try to avoid both for myself and my clients. Getting pre-qualified for a loan is an ABSOLUTELY MUST and the very FIRST STEP in the home buying process. Read through below to se why.

What is the lender looking at when they qualify for a loan?

The total loan amount a lender will agree to provide is directly tied to your income and expenses. As a homeowner, you will be paying a monthly loan payment, along with the cost of insurance, property taxes, utilities, and maintenance. A lender looks for a solid history of income, employment, and credit. The lender also will review your expenses, including automobile payments, credit-card debt, education loans, child support, alimony, etc. If you are borrowing money for your down payment, the lender will treat the interest payments on that loan as expenses. 

Providing an honest and an accurate information as possible will help the lender in turn to determine how much money you can afford to spend on a home, without taxing yourself on all the other things you have to have.

What do I need for a down payment?

Some people may qualify for special government-insured loans offered through the Federal Housing Administration (FHA) or Veterans' Administration (VA). The down payment needed for these loans is minimal. But, unless you can qualify, you will often need a down payment equal to 20 percent of the purchase price to avoid paying the extra cost of Private Mortgage Insurance (PMI). This insures the lender against nonpayment of the difference between the customary down payment and the down payment actually paid. At the time of this writing, the minimal down payment for a VA loan can be as low as 0%, 3.5% for a FHA loan and 5% for a conventional loan. Your lender will tell you what they need you to put down as a down payment. This is the minimum amount that you have to put down if you want to buy a home.

What do I need for the closing costs?

Along with the down payment, you will need between 2 and 4 percent of your loan amount to pay for closing costs, unless you are obtaining an FHA or VA loan. If you are obtaining a loan, the law requires the lender to provide an estimate of these costs at the time you apply. be sure to ask for any question about these costs that you do not understand. It is your RIGHTS to know and question about every single fee that you will be charged for. This closing cost normally include your pre-paid escrow costs to cover your taxes, insurance etc that your lender changes you upfront. Other things include the loan origination fees, lender fees, county registration costs, courier fees etc. Your lender will provide you a GOOD FAITH ESTIMATE that shows all these costs.

I want to buy a home but my credit history is poor. Is there anything I can do?

Yes, there are several options. First, before you attempt to buy, you will want to improve your credit record by paying your bills on time and by curtailing your borrowing.

Second, credit-reporting agencies can and do make mistakes. Major credit-reporting companies such as Equifax, Trans Union, and TRW maintain computer files on your financial history. The law gives you the right to examine your own file. A summary of the report must be made available to you free of charge. However, there is a fee if you request a full credit report.

If you believe your credit report is in error, you may challenge the report by explaining the error in writing. The information must be verified by the agency if it is kept in the report. If you discover inaccuracies and you can prove them, you can demand that the agency correct them within a reasonable period of time. If there are no errors, you have the right to include a letter of explanation of up to 100 words in your report. The agency must include your statement, or a clear and accurate summary of it, in all future reports.