Before you can buy a house, you have to know how you’ll pay for it. For 88 percent of homebuyers, that means financing the purchase with a loan, according to the National Association of Realtors' 2018 Home Buyer and Seller Generational Trends Report.
A major part of finding the right lender and knowing what you can afford is providing information to the bank, credit union or other lender to prove you can continue to pay back the loan, with interest, over time.
[Find out more about The Best Mortgage Lenders of 2018.]
There are two options to find out what a bank is willing to lend you, as long as everything checks out once you’ve picked a house: prequalification and preapproval.
Prequalification. Having a prequalification letter from a lender means you’re conditionally approved to purchase a home up to a certain price, based on basic information about your income, debt and how much you have saved for a down payment.
While prequalification doesn’t require the documentation and proof of funds needed for a preapproval, it’s particularly helpful for homebuyers who have no idea about their budget for a home. “Prequalification gets them in a position to shop,” says John Pataky, executive vice president at TIAA Bank.
Preapproval. With preapproval, you’re providing the details about your employment and financial information and letting the lender pull your credit history to learn more about you as a borrower. A preapproval means the lender is stating confidence in lending you a certain amount of money to purchase a home, pending any issues with the house itself or unforeseen circumstances with your finances.
While the differences between preapproval and prequalification are merely a matter of reporting financial information versus providing documentation for it, a preapproval letter can be far more powerful when it comes time to place an offer on a home. That's because with preapproval, the seller has proof of your lender's confidence in you as a borrower. While prequalification makes it easier to shop for a home you can more realistically afford, preapproval gives you the strength to negotiate a purchase price, Pataky says.
Brian Simmons, founder and CEO of Ask a Lender, an online platform to help consumers shop lenders and loans and get financial advice, echoes the preference for preapproval: “One of the first things a buyer should do when they begin looking at homes is getting preapproved for a mortgage.”
If your local housing market is seeing frequent bidding wars and multiple offers on houses, a preapproval could help keep you from being overlooked by sellers who have many options to choose from when it comes to sale terms and price. Still, there are times when prequalification may be your best option to begin house hunting.
Here are five things to keep in mind as you decide whether prequalification or preapproval is the best move for you.
To shop lenders, prequalify. You may not have decided on the lender you’d like to work with yet, and shopping around by inquiring with three lenders or so is always recommended. Rather than just talking to a loan officer about available programs, you can use the prequalification process to gauge how much a lender would be able to lend to you. Of course, don’t base your choice of lender solely on the maximum price you prequalify for. Also consider what terms, rates and other details will best suit you in the long run.
[Read: The Guide for First-Time Homebuyers.]
Don’t get preapproved by too many lenders. Preapproval includes a full review of your financial background, including your credit history. As a result, that inquiry is noted in your credit report and can negatively impact your credit score if you have too many recent checks into your credit history.
“It doesn’t necessarily reflect well on you,” Pataky says. If you’re unsure which lender you want to work with, ask more questions and consider trying out prequalification first, then apply for preapproval once you’ve made your decision.
Neither guarantees a rate lock. The interest rate on your mortgage may be a deciding factor in whether you can afford a certain house. But your ability to secure a desirable interest rate through a rate lock, which guarantees your rate will not increase over a set time period – typically between 30 and 90 days – often only happens when you’ve found the house you want to buy.
Rate locks vary based on lender practices, but prequalification rarely offers a rate lock, and preapproval often doesn’t include a rate lock until you’ve identified the house you wish to purchase – or even until the seller has accepted your offer.
Ask your lender what’s required to ensure a rate lock and how long that rate lock lasts. In many cases, the lock is limited to 30 days, which is just enough time to get through the contract period on a house.
Preapproval still isn’t a done deal. Even if your lender is impressed by your salary and pristine history of paying off debt, no preapproval is a guarantee that a mortgage will be approved once you’ve found the house you want. There are still other factors at play, the first of which focuses on whether your financial situation has changed.
“The factors by which you were preapproved have to be maintained,” Pataky says. That means not quitting your job, not buying a Maserati to keep up with the Joneses in your new neighborhood and not opening up five credit cards in the last two weeks, he explains.
Another factor standing between you and mortgage approval is the house’s condition and appraised value. Even if you’re preapproved to buy a house for $400,000 and agree to that same price with the seller, if the house appraised for only $375,000, your lender will likely only approve you for a mortgage on the house at $375,000. You’re then tasked with trying to renegotiate on price with the seller, coming up with the extra cash on your own or starting your search for a home all over again.
Keep asking your lender questions. Even if you’ve bought a home with a mortgage before, it’s likely been at least a few years, and the process will feel different. At every step of the way, you shouldn’t be afraid to ask your lender about expectations, timing and documents you should have ready to help streamline the process as much as possible.
“During the preapproval process, the buyer will need to provide some of the documentation their loan officer will use when it’s time to underwrite the loan,” Simmons says. “This is a good opportunity to ask the lender questions about the process and get a checklist of documents the lender will need, such as pay stubs, bank statements and tax documents.”
The fact that you’re already looking to better understand the process and make the right move puts you at an advantage in the homebuying process. “Typically we find out that the consumer who seeks the education, the knowledge and the discipline to go through a relatively qualitative process … they’re fairly responsible,” Pataky says.
Are these must-haves on your list?
One of the first steps you take when deciding you want a new home is determining what you need in order to be happy there. The list of your must-haves can get long, and you reasonably can’t expect to find a house that perfectly matches all your criteria. “Someone has a list of 10 things – if they can find a house that has seven or eight of those, they’re doing pretty good,” says Jeff Plotkin, a Texas-licensed Realtor, attorney, certified public accountant and vice president of Habitat Hunters Inc. in Austin, Texas. Deciding what needs win out in your next home search can be tough, but there are a few key features and amenities many buyers seem unwilling to live without.Right in your price range
Right in your price range
Being able to afford your new home is a given, but buyers are often faced with having to choose between stretching their budget to have the master suite they want or having more reasonable monthly mortgage payments. Price often wins out in the end – you’re less likely to enjoy that master suite if you’re eating soup and foregoing vacations for the next five to 10 years to pay it off. In the 2018 National Association of Realtors Home Buyer and Seller Generational Trends report, home affordability was one of the three most important factors for respondents who recently purchased a home – behind only quality of the neighborhood and a location's convenience to work.In your preferred location
In your preferred location
Homebuyers care a lot about being able to get from point A to point B – as well as points C, D and E. Your future neighborhood can dictate what school your kids go to, how long it takes to get to work and how easy it is to stop at the grocery store when you forgot an ingredient for dinner. Plotkin says buyers put a lot of stress on where the house is, rather than what’s in the house itself. They’re looking for “proximity to schools, shopping, entertainment, public transportation,” he says.Interior over curb appeal
Interior over curb appeal
A handsome exterior keeps potential buyers from quickly driving away, but insight from new construction marketing site HomLuv.com reveals that it’s the interior that most often serves as the deal-maker. HomLuv’s website allows homebuyers to begin their search for a new home from the room they care about most, whether that’s the kitchen, living room or master bathroom. The one part of the house people don’t seem too worried about? Outside. In the roughly two months since HomLuv launched, “no one has chosen to look at exteriors first,” says Mark Law, vice president of product management for BDX, a home builder marketing company and parent company of HomLuv.The right number of bedrooms
The right number of bedrooms
While the interior of the home allows more wiggle room to compromise on your needs, there are some details that buyers must have. The right number of bedrooms would be the big one. Family expansion is often a primary reason homeowners start looking for a new house, so leaving out that extra room would defeat the entire purpose of the sale. According to the NAR report, 85 percent of homes purchased by respondents in 2017 had three bedrooms or more.Window treatments for reference
Window treatments for reference
Staging matters in a home. As much as we think we can picture how a vacant house will look with our own furnishings and decor, at the end of the day we need some suggestions. Law says builders will include big picture windows in bedrooms or over the tub in a master bathroom to let in natural light, but if the photos show the space without curtains or blinds, house hunters will inevitably see a design flaw. “They’ll say, ‘I’m not an exhibitionist,’” he explains. To avoid turning homebuyers off, window treatments should be included in listing photos and for home tours.Move-in ready
The condition of the home you shop for often goes hand in hand with your budget and the neighborhood you hope to live in. If your budget is at the lower end of the price range in the hottest community in town, you’ll likely find yourself buying a house that needs a little love. If your budget doesn’t restrict it, chances are you’ll have your pick of properties that have been turned by real estate investors. “The [buyer] demand is for 100 percent move-in ready condition,” says Bobby Montagne, CEO of Walnut Street Finance, a private money lender focused on home flipping in markets in Virginia, North Carolina and the District of Columbia metro area.Possible to picture your vision
Possible to picture your vision
Even if you’re one of the detractors who prefers a fixer-upper, it’s still necessary to be able to envision how the space will look once you’ve added your personal touches. Based on reactions from HomLuv users, details as small as the cabinet color in a photo can change the way a person thinks about a house. Law says he’s found preferences differ from region to region – darker cabinets may see more love in the South, while in California the preference is for white kitchen cabinets. “You could offer a free puppy and free pots and pans with the house, but if the cabinets are dark they still don’t want it,” he says.Warranty available
For newly built homes and those that have been recently flipped with significant work, you want to know that the professionals involved stand by their work. New construction homes often come with a warranty from the builder or the option to get a third-party warranty, and you should ask the investors involved with a flip for the same level of protection. “A good builder [or] a good flipper does not have a problem with that,” Montagne says. If an issue arises within the life of the warranty related to the workmanship, you can rest easy knowing you’re covered financially for the repairs.Potential for value growth
Potential for value growth
Your home isn’t just where you’ll live – it’s also an investment. There are a few easy decisions you can make that reduce the chances of losing out on potential growth in value over time, whether that means buying in a neighborhood where home values are steadily growing, finding a home in a desirable school district or avoiding living next to a strip mall. “When you’re buying a house, you’re not only buying it for yourself, you’re buying it for resale,” Plotkin says. “So most people are not going to want to back up to commercial [property] or a busy road.”Read More
She has appeared in media interviews across the U.S. including National Public Radio, WTOP (Washington, D.C.) and KOH (Reno, Nevada) and various print publications, as well as having served on panels discussing real estate development, city planning policy and homebuilding.
Previously, she served as a researcher of commercial real estate transactions and information, and is currently a member of the National Association of Real Estate Editors. Thorsby studied Political Science at the University of Michigan, where she also served as a news reporter and editor for the student newspaper The Michigan Daily. Follow her on Twitter or write to her at firstname.lastname@example.org.
Teresa Mears | May 3, 2019
Conventional wisdom says 20%, but you can buy your first home with much less down.