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Home Mortgage Qualification
Are you interested in buying a home but concerned that you may not qualify? If so, you are not alone. In most cases, it is not a problem of not qualifying, simply not understanding the process. Knowing how much home you qualify for is one of the first steps you should take.

Remember when buying a home that there are many different cost involved. For example, there is the down payment, closing costs, and of course, the time involved for searching for the home. Buying a home is a major investment and one of the most important decisions you will make. Therefore, you want to do it right, which starts with the qualification.

Unfortunately, many people interested in buying start by searching. They spend countless hours going through home after home, all the while getting their hopes higher and higher. Finally, they find the perfect home, make an offer, and then discover they cannot qualify. Not only have they been let down, but the seller has also been let down. To rectify this problem, you can be pre-qualified or pre-approved, which are two very different things.

Pre-Qualification

Becoming pre-qualified is easy and quick. In most cases, you can receive a verbal pre-qualification in a matter of 30 minutes and a written confirmation in as little as five days. Being pre-qualified consists of looking at your income versus debt ratio and determining the amount of money you could afford. Generally, your credit history, employment history, and other factors are taken into consideration. While you are not actually approved for a loan, you know what price range to search.

When you become pre-qualified, you can now narrow your search to the price range you would fall in, which saves you time and frustration along with the seller. Although this is not as strong as being pre-approved, if a seller had three strong offers but only yours came with a pre-qualification, chances are the seller would choose your offer over the other two.

Pre-Approval

Pre-approval is a whole other beast. This is much better than being pre-qualified and gives you buying power. To become pre-approved, you actually go through the entire buying process excluding house hunting and closing. This means that your credit history is checked, employment history verified, and are actually approved for a mortgage loan. The only thing is that you have not yet chosen the home.

In this case, you have the money approved and sitting in a bank or at a lending institution just waiting for you to use it. Because the loan is approved, sellers will take your offer serious and be much more willing to negotiate. For instance, if the seller has one buyer who is not pre-approved but offers the full price of the home at $200,000, and you as a pre-approved buyer making an offer of $195,000, you would probably win easily.

The reason is that the seller does not know if the other buyer will even qualify. Therefore, going with the buyer who is not yet pre-approved is a gamble. However, now the seller knows not only that you have the money waiting, but also that most of the process is done so the transaction would be quick. This is exceptionally attractive to sellers who are motivated due to job transfer, divorce, or some other reason of needing to move fast.

Down Payment

In addition to becoming pre-qualified or pre-approved, you also need to think about the down payment when buying a home. Typically, a first-time homebuyer will be on a tighter budget than someone buying a second or third home will. Many years ago, it was common practice for people to save for years in order to put the standard 20% down. While some people still put a large payment down, it is not nearly as common as it once was.

Today, the average down payment is 5%. Some programs are available that would get you into a home for as little as 3% but you should expect to pay from 5% to 10%. Remember that the more you can put down, the less principal to be financed with interest. The result is a lower monthly payment and a lower mortgage balance overall.

As you start your search for a home, keep in mind that lenders will focus on five primary factors. These factors are what will be considered for a loan:
  • Closing Costs
  • Credit History
  • Current Assets
  • Income
  • Property
 
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