Runners to Your Marks, Get Set, Go Buy a House!
Sometimes being a home buyer can feel a little like being a runner - you have to train (get your finances in order), warm up (get pre-approved for a mortgage), and actually run the race (search for a house or real estate). You cannot expect to run a marathon without any prior training, and the same goes for buying a house. Make sure you do all the necessary work in order to ensure a positive home buying experience.
Runners to Your Marks
Taken from your credit history report, your credit score is based on points you receive for being a good borrower. The most common scoring system used for mortgage approvals was created by the Fair Isaac Corporation® (FICO®), which accesses the three main credit reporting bureaus (Equifax, TransUnion, and Experian). Credit scores can range from as low as 300 points to as high as 850 points. People with average credit usually score around 620, good credit at 660, and excellent credit above 720.
It is important that you maintain a good FICO score because it can help you get a mortgage loan with lower interest rates. For example, someone with a credit score of 620 requesting a $215,000 30-year loan may pay an APR of 7.60%. A score of 720 or higher would qualify them for a 6.00% APR (a difference of 1.60%), or a potential savings of $230 per month. Should their credit score fall below 620, they are then in the sub-prime mortgage category, and their mortgage rate could go as high as 8.53%. During the pre-approval process, the financial institution will tell you what range of interest rates [insert link to mortgage rate tables] you are likely to qualify for. Therefore, you should try to get your credit in order before you start shopping for a loan.
Before you begin house-hunting, it’s best to find out from your financial institution if you are pre-qualified or pre-approved for a mortgage. But in order to know these things, you first must understand the difference between the two. Do not be caught in an unfavorable home-buying situation due to a confusion of terms.
When a financial institution pre-qualifies you for a mortgage, they are merely giving you an idea of how much you might qualify for. Through the pre-qualification process, you will have to give the financial institution your financial information, including your income, credit score, and debt-to-income ratio. Therefore, when you get pre-qualified, it is based only on what you have told them about your financial situation - the information has not been checked or verified. When you have been pre-qualified, the financial institution will give you a letter which you can present to the seller so they will have an idea of how much you will be able to give them for their house. The next step is to be pre-approved.
Being pre-approved for a mortgage loan not only means that you have told the financial institution your financial information, but also that they have checked all the information and made sure that it is completely accurate. Also, they may have looked deeper into your credit history in order to examine your borrowing habits. A pre-approval will determine the maximum amount you can spend, and it is almost the equivalent of a cash offer because the seller knows that it is secure and trustworthy.
Now that you have strengthened your credit report and have been pre-approved, you are ready to start looking for the home of your dreams. So, put on your spikes, go to the starting blocks, and when the starting pistol goes off, you can shop for a house with confidence.
Source: Informa Research Services