With mortgage rates still hitting record lows due to the COVID-19 pandemic, many people are now considering buying a home. If purchasing a property is on the horizon and you’re ready to take the first step toward home ownership, keep reading for a rundown of everything you need to know about pre-qualification for a mortgage.
Mortgage pre-qualification refers to an informal meeting with a financial officer to discuss how much money you may be eligible to borrow, before you submit your mortgage application. By chatting about your financial assets, current income and other details, you’ll be able to get a clearer picture on what home you can afford – so that you’re not shopping for houses outside your price range, or selling yourself short on your dream home.
What Information Will You Need?
To prepare for the pre-qualification process, consider the following points.
- Credit Score: In general, you’ll want to go into a mortgage with a credit score of 620 or higher, to ensure you get the best interest rate possible. If you don’t know your credit score, you can request a free copy of your credit report online. During your pre-qualification meeting, the financial officer can tell you more about what your credit score means for getting a mortgage. A lower credit score doesn’t necessarily preclude you from buying a house, but it could mean you need to make a larger down payment or take out a higher-interest loan.
- Assets: Financial lenders want assurance that if you take out a loan, you’ll be able to pay it back – so demonstrating your assets is a key part of the process. Bank statements, investment account details, and other documents such as retirement accounts will need to be submitted once you formally apply for a mortgage.
- Down Payment: How much are you prepared to spend up front? Can you prove that you’re in possession of that amount? Paying more money up front will lower your total loan amount and influence what price range of home you can afford, so prepare to talk through this topic with your financial officer before you start shopping for homes.
- Income: You’ll need to share details about your income to prove how much you’re taking home. Be honest with the Mortgage Loan Originator if you’re expecting any change soon to your job situation, as income will be reviewed and verified before the final approval for any home loan.
- Products: If you’re already in possession of a credit product such as a student loan, a credit card or another mortgage, this could affect your eligibility to borrow for a new home. Then again, if you’ve been making your payments in full and on time, having a credit product might be boosting your credit score. Either way, prepare to chat about credit products during the pre-qualification process.
- Conforming: Every year, the Federal Housing Finance Agency sets a baseline loan limit for home mortgages. In 2021, that number is $548,250 for most places in the US; although the limit is higher in expensive markets like New York City. When you keep your mortgage equal to or under the conforming loan limit, you can get a better interest rate and terms – but it’s also OK to exceed this number if you can afford it. Your Mortgage Loan Originator can share more information about this during your pre-qualification meeting.
- Jumbo: If your mortgage does exceed the conforming loan limit, it’s considered a nonconforming or ‘jumbo’ mortgage. This could mean a higher interest rate or a bigger minimum down payment, so be sure to ask about terms if you’re seeking pre-qualification for a larger mortgage.
- PMI: Many borrowers are required to purchase Private Mortgage Insurance (PMI) in order to qualify for a home loan. PMI helps to protect your lender in case you’re unable to make good on your mortgage payment obligations. However, if you can afford a bigger down payment – traditionally 20% – then you likely won’t need to budget the additional money for PMI.
Now that you've thought through all the important aspects of pre-qualification, you're one step closer to a big financial milestone! If you still have questions about pre-qualification, or what to do once you have your eye on that dream home, take a look at some of our financial education videos. Plus, our loan experts are always available to help make your mortgage experience straightforward and hassle free. See more about HUECU's mortgage offerings here!