How to Prepare for the Homebuying Prequalification Process
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Thinking of buying a rural home? The first step is prequalification, an essential process to determine how much you can afford.
At Compeer Home, we’re here to ensure you understand the process and know how to come best prepared.
Let’s break down the steps in the process so you can start your homebuying journey with confidence and avoid common mistakes along the way.
What Is Prequalification?
Prequalification is a way to gauge your purchasing power before you start house hunting. A loan officer evaluates your income, debts and creditworthiness to estimate how much you can borrow.
While not a final loan approval, a prequalification letter signals to sellers and real estate agents you’re a serious buyer.
Steps to Prepare for Prequalification
Preparation is key to a smooth prequalification process. Here are the essential steps to get ready:
- Understand Your Financial Picture
Before contacting a lender, review your financial situation. Consider your income, existing debts and monthly expenses. Use our mortgage calculator to help you assess how much house you can afford. We recommend keeping your housing costs (including mortgage, property taxes and insurance) at around 30% of your gross monthly income. - Save for a Down Payment
A strong down payment is one of the most critical aspects of homebuying. Start saving as early as possible. Many lenders prefer a down payment of at least 20% of the home’s price to avoid private mortgage insurance (PMI), but at Compeer Home, we have options for a smaller down payment. In fact, buyers eligible for our First-Time Homebuyer Program are given the option of a zero down payment with no PMI. - Gather Necessary Documents
Be prepared to provide your loan officer with the following:- Two years of tax returns
- W-2 forms
- Pay stubs from the last month
- Bank statements showing savings and reserves
- If self-employed, a balance sheet and year-to-date profit and loss statement
- Check Your Credit
Your credit score plays a significant role in determining loan approval and interest rates. Pay your bills on time, reduce outstanding debts and avoid taking on new credit before or during the loan process. - Consider Future Expenses
For rural properties it’s important be mindful of costs associated with unique features like wells and septic systems. Budget for these potential expenses to avoid surprises later.
Common Mistakes to Avoid
Even the most prepared buyers can make missteps. Avoid these common mistakes:
- Taking on New Debt: Avoid financing major purchases like cars or furniture while going through the prequalification process. New debt can alter your debt-to-income ratio and jeopardize your loan eligibility.
- Changing Jobs: A stable employment history is crucial. If you’re considering a job change, discuss it with your loan officer first.
- Ignoring Deferred Maintenance: If the property you’re interested in requires major repairs like a new roof or septic upgrade, you’ll need to work with the seller to address these before closing.
How Compeer Home Can Help
Prequalification is a vital step toward achieving your dream of homeownership. By taking the time to prepare and working with a trusted lender like Compeer Home, you’ll be well on your way to finding the perfect property.
At Compeer Home, we’re committed to making your homebuying journey as smooth as possible. Our loan officers are here to answer your questions and provide personalized advice tailored to your financial situation.
Ready to get started? Find the mortgage specialist in your area today!