There are several advantages to getting pre-qualified for a home loan, which as many borrowers may not know, is different from being pre-approved for one. To pre-qualify a borrower for a home loan, mortgage lenders calculate their ability to make monthly payments which allows them to hand out safer loans; Getting pre-qualified for a home loan also allows the borrower to shop within their means when buying a home since they’ll already be aware of how much they’ll likely get from a lender. When you get prequalification for a loan, you’ll know the maximum amount for which you can receive.
In order to get prequalification for a home loan, you’ll need to supply a lender with the basics of your financial information. This will be used to determine how much you can afford on a monthly basis to pay back. You should provide your gross pay (before taxes and any deductions are made), liquid assets, and other savings that you have and can use towards making a down payment and paying closing costs. Figured into your calculations are any applicable school loans, debit (including credit cards), any outstanding loans, installment payments, personal loans, and even your credit history is taken into account.
During the calculation process, the interest rate and mortgage term is determined by the lender for the amount of the loan. Higher interest rates come with higher monthly payments; If you get a high interest rate, you could get approved for a lower principal amount. The amount of your loan can also be affected by the size of your down payment; Principal amount is reduced for higher down payments, which may even qualify you to buy a larger, more expensive home.
The benefits of getting prequalification for a loan include; You’ll know how much you’ll have to pay towards hazard insurance, mortgage insurance, and property taxes, which are all likely to be added onto your monthly loan payments. When you know the figures of these aspects, you’ll have an idea of how much exactly home ownership is going to be costing you in the future. Once you get pre-qualified for a home loan, you don’t necessarily have to go for a mortgage that size; You can find one that’s slightly lower, which may make repaying the loan back easier, especially if you have a high interest rate.
When a lender is taking your financial situation into consideration for a home loan, most lenders will only allow you to pay up to 30 percent, and no more, of your total monthly income towards paying the mortgage payment. Borrowers who have less than stellar or bad credit may have a difficult time getting a good rate or even pre-qualifying for a loan of a certain amount; Those with good credit tend to get higher mortgages with lower interest rates, which allows them to get a sizable loan. Shopping for a home without prequalification could potentially be a waste of time since you could be looking at home beyond your means.