Mortgage preapproval is an important first step
You need to make sure you can get a mortgage and know exactly how much you'll be allowed to borrow before you start house hunting.
A few years ago, anyone with a pulse could qualify for a home loan as lenders recklessly lowered their standards during the housing boom.
Now, about half of all borrowers are rejected because they don't meet increasingly difficult demands for higher credit scores, bigger incomes and fewer debts.
Asking to be preapproved is your first chance to find out where you stand.
You fill out an application that asks how much you make, how much you've saved and how much you owe on everything from cars to school loans to credit cards.
The lender evaluates that info, checks your credit reports and credit scores and replies with a letter that says you can qualify for a mortgage and how much it's willing to loan.
The process is usually free, and being preapproved boosts your credibility with real estate agents and sellers who don't want to waste their time on buyers who may not be able to get financing.
Indeed, if you're looking for a good deal -- and who isn't? -- you stand a better chance of your offer being accepted if you've been preapproved. It's harder to turn down a sure thing.
Don't settle for being prequalified -- otherwise known as "preapproval light."
That means the lender took your word for everything and didn't pull your credit history or scores. It doesn't really say much about your ability to get a loan, and sellers consider it to be meaningless.
Here's how to get an actual loan preapproval:
Step 1. Check and fix your credit reports.
Your credit history plays a huge role in winning approval for a home loan. You want to see it before any lender does.
You are entitled by law to a free credit report from each of the three major credit reporting agencies every year. To get all three reports, go to www.annualcreditreport.com.
Credit reporting agencies don't check the information given to them by credit card companies, utilities or other companies. According to a survey by the Government Accounting Office, nearly three-quarters of all credit reports contain at least one error.
Check every entry on every report for accuracy. Then contact the reporting agency to correct any mistakes. Each credit report tells you how to do this.
You can't ask the reporting agency to remove legitimate black marks on your credit report, such as missed or late payments, repossessions, foreclosures or bankruptcies.
But you can attach a written statement to your credit report explaining your side of the story. For example, describe how an illness, injury or unemployment caused a financial crisis or explain that a late payment was caused by an online banking error.
Step 2. Assemble your paperwork.
Use our mortgage checklist to gather all the documentation you'll need for an application.
You'll need lots of information from those documents to complete the application. The lender should ask for at least some pay stubs, credit card bills, bank or retirement plan statements.
Step 3. Pick a lender.
The best loan for most buyers is a traditional 30-year, fixed-rate loan with no points and fees of $2,000 or less.
These are safe, totally predictable loans that carry none of the risks associated with interest-only or adjustable-rate mortgages. You'll never have to worry about interest rates going up, principal payments kicking in or any other nasty surprises that could drive up your housing costs a few years down the road.
Use our extensive database of mortgage rates to find the best deal.
You don't have to get your loan from the lender that preapproves you, but you'll be one step ahead if you do.
Step 4. Apply for preapproval.
Whether you apply in person or online, the information you'll have to provide is pretty much the same. You'll be asked:
- For your street address, e-mail address, phone and Social Security number. If you've lived at your current address for less than three years, the lender will want to know where you lived before that. If you are buying this home with someone else, they'll probably want to know your relationship to any co-borrowers.
- Whether you currently rent, own or live with family.
- How many dependents you have.
- Your annual income.
- Your occupation, employer and how long you've worked there. If you've been with the company for less than two years, it will ask where you worked previously.
- Your assets -- what you own and what it is worth. This includes your current home and other property, checking and savings accounts, stocks, bonds and retirement accounts.
- Your liabilities -- how much you owe, to whom and how much you pay every month.
- Whether you have filed for bankruptcy in the last 10 years.
- Whether you are behind on any bills.
- Whether you are a first-time buyer.
- Whether you are buying a home as a residence or rental property or, in the case of a duplex or other multifamily unit, both.
You should get preapproval in one to two weeks. The more complicated your finances, the longer it will take.
You may be asked to clarify or provide additional information by phone, e-mail, fax or traditional mail.
Step 5. Start hunting for that dream house.
When you find out how much you can borrow, you're ready to start house hunting.
Preapproval usually comes with a 30- to 90-day time limit. Most lenders will run another credit check and extend the offer if necessary.
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