When you begin searching for a new home, the best thing you can do is start by getting prequalified for a mortgage. Taking this essential step early in the process can benefit you significantly because you can find out how much you will be able to borrow (the approximate amount you can get approved for on your mortgage loan), discuss options for loans and budgeting, and show sellers that you are serious about the home buying process. In order to get prequalified, here’s what you will need.
One of the first things a lender will ask to see is proof of income. Generally you can show this with your W-2 statements from the past two years, and pay stubs that show your most recent and year-to-date income from your employer (which also proves that you’re employed). If you have income from alimony or bonuses and want that included in your loan consideration, have the documentation to prove it. It’s much more difficult to get a loan if you are self-employed, so be prepared to prove your income with tax filings and other documentation if that is the case. Ask your lender if you are self-employed what they would need to see.
Lenders want to know that you will be able to repay a loan before they give it to you, so they also like to see what your cash flow is like and find out if you have any assets, including cash, available. The easiest way to show this is through bank statements from the past couple of months and investment account statements, but you can talk to your lender if you have questions about what they want.
No-down-payment loans do still exist, but they are much harder to get. In most cases you will need to have at least 3.5% of the home price available as a down payment (for FHA loans), and 10 to 20% available for conventional loans. Be prepared to show the lender that you have this available in cash; if you’re getting the money from a friend or relative to help with the down payment, you’ll need to show a gift letter so they know it’s not a “loan” (which would make it a liability for you).
Prequalification may not require a credit check (some lenders differentiate between prequalification, which is a quick process without a credit check) and pre-approval, which is more in depth, but your lender may ask you to estimate your credit score. Anything above 720 is usually considered excellent, while anything below about 620 may not be good enough to get a loan without a much larger down payment.
Other documents to take along for your prequalification meeting include identification ( a driver’s license or other government-issued ID), Social Security number, and anything else they request as part of the process. Once you have your prequalification you can get started shopping for the home of your dreams!