First time home buyers face a lot of challenges to get approved for a mortgage loan. Nevertheless, through substantial preparation and by following tried and tested steps in applying for a loan, even a first time home buyer will experience high chances of success in getting approved. If you are serious about buying a house, the first step is not to shop around for homes on the market.
You need to begin by getting pre-approved and compare different mortgage lenders offers for first time buyers. A lender pre-approval is also known as a mortgage in principle. It gives the buyer an idea of how much lenders will allow them to borrow, and for sellers to have confidence that the buyer is capable of financing the home they want to buy. Once you have started the pre-approval process you also want to start the comparison of different lenders to see which is going to be best for you. You may decide to start with the 1 lender or try 2 – 3 different lenders in order to get the best terms.
How to get pre-approved for a mortgage
Some may think that getting pre-qualification is tantamount to a pre-approval. However, a pre-qualification only gives an estimate on how much a buyer can afford to spend. On the other hand, a pre-approval means that a lender already checked your credit rating and thoroughly confirmed your personal information to approve a specific amount for borrowing. To get a loan pre-approval or mortgage in principle, the lender will ask for the following:
- Proof of income. Gone are the days when lenders used to offer ‘no verification’ loans. Since the last economic crash, lenders became stricter in the approval process. You need to prepare two years’ worth of tax returns along with current pay slips, and other documents for additional sources of income
- Proof of assets. Lenders require applicants to provide proof of their capacity to pay for down payment and other costs incurred in closing a mortgage. Depending on the type of mortgage loan program, down payments may range from 3.5% for FHA loans to 20% for conventional loans.
- Good credit rating. If you are aiming for low-interest rates, your credit rating should be within the ballpark of 750 or higher.
- Proof of employment. In addition to requesting for copies of pay slips. Lenders will also ask for proof of employment such as the contact information of your current employer. In cases where you are new at your current job, the lender may also request to contact your previous employer as an additional reference.
Aside from those mentioned above, you will also need to present documentation such as government ID’s.
Why is a mortgage in principle important?
Getting a loan pre-approval has many advantages. Like what was already discussed above, sellers will have confidence in your ability to afford a home. This is especially valuable for a first time home buyer. You’ll realize that when you are already shopping for a home and attending open houses, all other buyers interested in the property will have a pre-approval letter of their own.
Having one gives you an edge over other buyers who have not applied for a pre-approval. The housing market is quite competitive, and the mark of a serious buyer depends on your willingness to make an effort and get pre-approved before you start looking at properties to buy.