4 things to do before you get pre-approved

Library | 3/26/2021
Mortgage Pre Approval

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If you’ve decided the time is right to buy your first home, you’re probably tempted to start house hunting right away. As you begin your research, you’ll likely see that the first step to homeownership is getting pre-approved.


Pre-approval means you’ve completed an official mortgage application with your lender and given them the necessary documents (proof of income, list of assets, credit report) to dive deeper into your financials. You’ll get a letter that qualifies you for a mortgage loan up to a certain amount. Once you have it in-hand, you can make an offer.


Seems pretty simple, right? Not so fast.


While getting pre-approved is the first step to making an offer on your new home, it shouldn’t be the very first step you take on your homebuying journey. There are a few other things you’ll need to take care of first — otherwise you risk not getting pre-approved.


Here are four things to cross off your list before you get pre-approved.


1.  Save for a down payment

A down payment is really just an initial up-front payment you make on your home. The larger the down payment, the less you need to borrow. And unless you qualify for a Veteran’s Affairs (VA) or USDA (for qualified buyers in a rural or suburban area) loan, you’ll have to put down some money. Basically, if you don’t have money for a down payment, you’re not ready to buy a house.


How much money do I have to put down?

The amount you put down is always a percentage of the total cost and varies depending on the type of mortgage loan you get. An FHA mortgage allows down payments as low as 3.5 percent, but that’s still a significant amount of money ($10,500 for a $300,000 home). A traditional home loan requires a down payment of between 5 and 20 percent, with at least 10 percent generally recommended for a better interest rate and lower monthly mortgage payment.


Bottom line: you almost certainly need a good chunk of money ready for your down payment before you seek pre-approval.


2.  Improve your credit score

Pay attention, because this is important: you must have a good credit score to buy a house. Your FICO score not only impacts your mortgage terms, but bad credit — or no credit — can easily bar you from qualifying for a home loan in the first place. For most loan types, you’ll need a credit score of at least 620, and you’ll only qualify for the best interest rates if your credit score is 740 or higher.


What can I do to improve my score?

If you don’t have much credit history, the right moves can yield some gains in as little as 30 days. But if you’re trying to bounce back from bad credit, expect it take longer. It’s worth digging deeper into the complexities of credit scores, but there are a few things you should do to get started.


First, make sure to pay all your bills on time. Late payments affect your credit score more than anything else, so this is non-negotiable.


Next, make smaller, more frequent credit card payments and ask for higher limits to increase your credit utilization, which is the percentage of your credit available for use.


Lastly, try to mix up the types of credit you use — credit cards and loans are both necessary for a good score.


3.  Come up with a budget

Repeat after us: the max amount you can get pre-approved for is not the same as a budget. Some lenders may pre-approve you for a lot more than you can really afford, and maxing out is never a good idea.


Hefty mortgage payments can leave you with no money for home maintenance (which you’ll certainly need, no matter how new your house is) and nothing to spend on meals out, vacations, new clothes, or savings. This is called being house poor — you’ve got a bright, shiny, new house…and that’s it.


How do I determine a budget?

The best way to avoid finding yourself house poor is to determine a budget before pre-approval.


Start by getting pre-qualified: you’ll provide some high-level financial info to find out what you may be able to afford.


From there, run the numbers and decide what makes sense for you. Do you plan on taking a big trip to Europe every year? Got three kids to send to college someday? Figure out how much you CAN spend and how much you SHOULD spend.


4.  Do a preliminary home search

The goal of looking at homes before pre-approval is not to find THE ONE. It’s to get a feel for what you want and what may be within your budget. Begin online, looking at sites like Zillow and Redfin. Explore not just the area you’re interested in, but a bit farther afield as well. Prices can change dramatically town to town, so it’s a good idea to be open-minded.


How can I make the most of a preliminary home search?

As you begin looking, start creating a list of the things you do and don’t want in your new home. Setting out your parameters before you start house-hunting will help you set boundaries — it’s easy to be blinded by a good deal.


Once you’ve exhausted the online search, start going to open houses and exploring towns in person. You might find you actually like the feel of an area you heard was too quiet, or decide a certain neighborhood isn’t worth going over budget after all.


Once you’ve saved up, made a purchase plan, and done a thorough preliminary search, you’ll be ready to get that pre-approval letter. Next comes the fun part — looking at homes and making an offer — and you’ll be totally prepared.


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At Valley, each of our Home Loan Consultants take great pride and care in helping you determine which lending option is right for you—and we’ll do so whether you’re looking to buy your first home, invest in a vacation property or refinance your existing mortgage.