Because it has lower interest rates than other types of loans, a mortgage makes homeownership more affordable and accessible.
A home is one of the most expensive purchases anyone can make in their life, and not everyone has the resources to pay cash for it. Fortunately, a mortgage makes it easier for anyone to buy and own a house today.
Getting a mortgage offers many benefits, but one has to meet specific requirements to qualify for it. These requirements aim to determine the amount of money a person can borrow and if that person has the ability to pay off the mortgage on time.
Want to know more about mortgages? This article will discuss information on what it’s all about and how you can pre-qualify for a mortgage.
What Is a Mortgage?
Before diving into the pre-qualification requirements of a mortgage, it’s important to talk about the basics first.
Do you even know what the word “mortgage” means?
Simply defined, a mortgage is a type of loan that you can use to buy or refinance a residential property. You can also consider a mortgage as an agreement between you and the lender that allows the lender to lawfully take your property from you once you fail to repay what you’ve borrowed from them.
Also referred to as “mortgage loans”, getting a mortgage is a great way to buy a home without spending thousands or millions of dollars upfront. Mortgages also have lower interest rates than personal loans, making them more affordable in the long run.
Who Gets a Mortgage?
According to statistics, 62.9% of homes between 2008 and 2017 were brought through a mortgage. This number shows how many people rely on a mortgage to afford real estate.
62.9% of homes between 2008 and 2017 were brought through a mortgage.
A mortgage is a necessity for individuals who can’t afford the full price of a house with cash — but do you know that there are other cases where getting a mortgage makes more sense?
Investors, for example, often choose to get a mortgage when buying real estate properties as this will free up their financial resources for other investments.
For you to qualify for a mortgage, you need to meet specific criteria first. For starters, you need to have a stable and reliable income, a debt-to-income ratio of 43% of your monthly income, and a good credit score.
Mortgage Pre-Qualification vs. Pre-Approval: What’s the Difference?
You’ll come across several terms once you decide to get a mortgage like pre-qualification and pre-approval. These terms are often used interchangeably but are not the same.
- Pre-qualification - You’re expected to provide an overview of your income, finances, and debts to a mortgage lender in the pre-qualification process. The lender will then give you an estimated loan amount based on the information you provide them. This process also serves as your opportunity to learn about different mortgage options and how these mortgages differ from each other. Through this process, you can determine which mortgage best fits your needs, goals, and finances.
- Pre-approval - Pre-approval involves filling out a mortgage application and giving your Social Security number to a lender. In this process, the lender will do a hard credit check to assess your creditworthiness before lending you any money. You’re also expected to provide your bank information, income, and employment history, as well as past addresses and other critical details during the pre-approval process. The lender will verify this information to calculate your debt-to-income (DTI) and loan-to-value (LTV) ratios, which are crucial factors in determining the right mortgage for you and the ideal interest rate.
How Long Do Pre-Qualification and Pre-Approval Take?
Aside from their different functions and purposes in the mortgage application process, pre-qualification and pre-approval also have different timelines. You should be aware of how long these processes take to help you manage your expectations.
The pre-qualification will generally take only a few hours. This process can be done online, and you can expect to get results within a few hours after you’ve submitted all the necessary documents.
On the other hand, mortgage approval takes longer because you’ll need to supply more information to the lender. The lender will also have to verify the information and documents you’ve given before you can proceed with your mortgage application.
Mortgage approval will usually take about ten business days after you’ve submitted all of the requested information and documents. This process will take longer if the lender finds errors in your documents or if you’ve submitted incomplete information.
How to Pre-Qualify for a Mortgage
Getting a mortgage is a cost-effective way of borrowing money because repayment tenures are flexible and quickly approved as these are secured loans. But, for you to maximize mortgages, you need to work on pre-qualifying for one first.
Pre-qualifying for a mortgage is the first step in getting a mortgage, and failure to meet the requirements in this process will prevent you from borrowing the money you need to buy a home. It’ll be tough for anyone to afford homeownership without the right mortgage.
Here’s 5 steps to follow to pre-qualify for a mortgage:
1. Check Your Credit Score
The first step to pre-qualify for a mortgage is to check your credit score. Credit card companies and banks will also provide this information annually for free.
National credit rating companies like TransUnion and Experian are also required to provide you with one free credit report annually. You can request a credit report from annualcreditreport.com as well.
Financial institutions and lenders will use your credit score as a marker to determine your reliability in terms of paying off your mortgage on time. Having a low credit score will make it more challenging for you to qualify for any type of loan, and, if you do qualify, expect to pay higher interest rates.
Individuals with poor or bad credit scores might have to delay getting a mortgage and put more focus on improving their credit score first. If you’re one of them, these tips can come in handy:
- Review your credit report and look for any errors. Once you’ve found any, notify the credit report agency right away. Outdated or wrong information, such as a misspelled name or accounts belonging to someone else, can adversely affect your credit score. Have these errors removed as soon as possible and see at least a 20% increase in your credit score.
- Set up payment reminders by using a pen and paper or downloading an app for this sole purpose. Paying your bills on time can eventually raise your credit score.
- Diversify your accounts by getting auto loans, credit cards, and student loans. Your credit mix makes up for 10% of your credit score and shows how you can handle different debts simultaneously. As long as you pay off these loans regularly, having a credit mix will help you improve your credit score.
In general, building a good credit score will take you about three to six months, depending on your existing credit score. If you have plans of getting a mortgage, prioritize having a good credit score as early as possible.
A good credit score is somewhere between 680 and 850. Having a higher credit score will increase your chances of getting a mortgage and qualifying for a lower interest rate.
2. Prepare Important Documents
As mentioned, the pre-qualification process will require you to submit certain documents. To expedite this process, make sure to prepare these documents in advance and have multiple copies.
Every financial institution and lender will have different requirements, but, in general, you are expected to provide the following:
- Basic bank account information
- How long you’re going to pay the mortgage off
- Income information
- Personal information (so it’ll be easier for the lender to perform a credit check)
- The amount you want to borrow
- The amount you’re planning to put as down payment
During this stage, prepare to provide more information that will support your financial capacity. For example, some financial institutions and lenders will require borrowers like you to provide tax information and pay stubs.
Take note that the requirements for pre-qualification will vary depending on the situation. For instance, if the lender found some discrepancies in your credit score, they might request other documents to prove your ability to pay off the mortgage.
Take the time to ask the lender about the requirements so you can prepare ahead. This is especially important if there is an urgency to get a mortgage.
3. Determine Your Debt-To-Income (DTI) Ratio
Aside from your credit score, financial institutions will also look into your DTI ratio in deciding whether to grant you a mortgage. Studies suggest that individuals with higher debt-to-income ratios likely run into more trouble making monthly payments.
Your DTI ratio will determine what percentage of your monthly gross income will go towards paying your debts.
To determine your DTI ratio, simply divide your monthly payments by your monthly gross income. As an example, if your monthly income is $7,000, while your future expenses and monthly expenses are $1,500, your debt-to-income ratio would be 21%.
Studies suggest that individuals with higher debt-to-income ratios likely run into more trouble making monthly payments.
You’ll have better chances of pre-qualifying for a mortgage if your monthly payments to existing and future debts are less than 43% of your monthly income.
If your debt-to-income ratio is more than 43%, you can still qualify for a mortgage if another person, like your spouse or immediate family member, completes the process with you. Most financial institutions will ask for the co-applicant’s information to verify your financial details.
Starting the process early will also give you more time to pay off smaller loans and some credit card balances. Paying these debts off early can improve your credit score and reduce your debt-to-income ratio.
4. Prepare Your Down Payment
Your down payment can significantly affect your interest rate and ability to build equity. If possible, put a higher amount of money as your down payment to lower your interest rate and help you build equity in your home faster.
If you’re going to pay a 20% down payment for your mortgage, you’ll have to pay Private Mortgage Insurance or PMI to cover the lender once you stop paying your mortgage and default on your loan.
The annual cost of PMI is around 1% of your outstanding loan balance and is regularly added to your monthly mortgage payment. Once your outstanding balance reaches at least 80%of the original loan amount, you can request to eliminate the PMI.
However, keep in mind that some types of loans require specific down payments, like 3% or 5%. Loans from the Federal Housing Administration or FHA require a 3.5% down payment, while loans from the US Department of Veterans Affairs or VA don’t require any.
Ask your lender about the down payment required in your mortgage so you can prepare early.
5. Find a Lender To Get Pre-Qualified
Once you’ve ticked off the requirements presented above, it’s now time to find the right mortgage and work with the right lender. Ideally, you should talk with at least three lenders and compare their interest rates and loan options.
If this is your first time getting a mortgage, you need to pay careful attention to the lender you choose. Scams are prevalent in the mortgage industry, and not having any experience in finding a lender increases your susceptibility to being a victim.
When finding a lender to get pre-qualified for a mortgage, keep these tips in mind:
- Work with a lender who will help improve your credit score: As mentioned, your credit score can make or break your ability to secure a mortgage, which is why you should work with a lender who offers to help your credit score. A reputable lender will work with you in improving your credit score because they know that this will expedite your mortgage application.
- Research carefully because all lenders are different: Even though lenders offer similar interest rates and payment schemes, they are still different from each other. You’ll have three lenders to choose from when getting a mortgage: banks, credit unions, and correspondent lenders. Take all the time to know more about these lenders and how they differ from each other.
- Ask plenty of questions: After you’ve shortlisted your options, call the lender and ask as many questions as you can about them. Prepare a list of questions beforehand so your time with them will be productive. Don’t forget to ask about their mortgage options and which ones you qualify for. Never work with a lender unless you fully understand their terms.
Work with Professionals
Pre-qualifying for a mortgage is an important step that can determine a person’s ability to borrow money to afford a house. You should provide the necessary requirements in this process to ensure that a lender entrusts you to borrow money from them.
And, while you can work on pre-qualifying for a mortgage on your own, it’s still best to ask for help from professionals. Many financial advisors and experts offer services today that can help you expedite the mortgage pre-qualifying process.
If you’re planning to get a mortgage soon, contact us at (904) 723-6300. We at 121 Financial Credit Union have helped thousands of clients pre-qualify for a mortgage.
With our experience in the industry, it won’t be long before you can pre-qualify for a mortgage and finally afford your dream house!