Start your home buying process in 2022
So you’re ready to buy your first property. Congratulations! It’s a big, exciting step. But how to start the process of buying a house? The answer may not be obvious.
Most people start with the exciting part: house hunting.
But you’re putting the cart before the horse. Because before you can make an offer, you need to figure out your financing and budget.
Here’s how to do that.
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The first step to buying a home
The first step to buying a home is making sure you can afford the mortgage. And that means getting preapproved by a mortgage lender.
The lender will check out your personal finances and issue you a letter confirming the amount you’re eligible to borrow. This not only gives you a firm budget for house hunting, but also lets sellers know you’re qualified to make an offer.
Preapproval is different from prequalification, where the lender asks you a few questions and relies on your answers. With preapproval, you’ll actually provide documents and go through most of the checks required for a full mortgage application. So preapproval is genuinely valuable. We’ll get into the process in a minute.
Preapproval is critical in today’s housing market
There’s another important reason to get preapproved, too. And that’s because there are way more buyers than homes in today’s market — which means you need to be ultra-prepared if you want to win a bidding war.
Most sellers are getting multiple offers right now. And most won’t even entertain an offer without a preapproval letter included.
In many property markets in America, making an offer for a home without preapproval has pretty much the same effect as not making one at all.
Benefits of starting the home buying process with a preapproval
There’s more than one reason to start the home buying process with a mortgage preapproval. Here are the big ones:
- You'll know your budget — You don’t want to find your perfect home only to discover you can’t afford it. A preapproval letter will tell you how much you can borrow. Add that to your down payment savings, and you know the maximum price you can pay
- You'll know you're eligible for a home loan — The checks a lender makes for a preapproval are thorough. And you can be reasonably confident that (provided the home you’re buying doesn’t present issues) you’ll be able to close on your purchase
- You'll know your mortgage options — You don’t have to choose the type of mortgage or the lender you’ll ultimately use during preapproval. There’s still time to change your mind. But it will help you discover the types of mortgages you can get. Those might be a conventional loan (including a conforming one from Fannie Mae or Freddie Mac) or a government-backed loan through the FHA, VA or USDA
- You'll know if you have any issues that could prevent you from buying — As one federal regulator says, “getting preapproved early in the process can be a good way to spot potential issues in time to correct them”
So now you know how to start the process of buying a house. With a mortgage preapproval.
What you’ll need to start the process of buying a house
In order to get preapproved for a mortgage and start house hunting, you’ll have to get your finances checked by a mortgage lender. The lender will verify that you meet basic home loan requirements and that you have the income and savings to afford a mortgage. Here’s what you’ll need to get started.
Every home loan program has slightly different requirements. So there’s no single rule book for home buyers.
That said, every prospective buyer will have to meet a similar set of criteria to get a mortgage:
- Decent credit score (usually 580-620 or higher)
- Two-year employment history
- Steady, reliable income
- Affordable monthly debts
- A clean credit history
Typically, the higher you score on each of those, the lower the mortgage rate you’re likely to be offered and the bigger the amount you can borrow.
But of course, not all borrowers have perfect finances. And some types of mortgages are designed for people who don’t score highly.
If you’re planning to apply for your preapproval a few months in the future, you can work on improving some of those four points. Often, the biggest difference you can make is paying down credit card balances to below 30% of their credit limits. That should boost your credit score and reduce your existing debts.
Nowadays, some lenders have advanced IT systems that can minimize the documents you have to provide for preapproval. Instead, you give the lender permission to check your bank and other records digitally. That way, it can take hours or even minutes for you to get your preapproval letter by email.
But that tends to work only if you’re employed and your loan application is very straightforward.
If, for example, you’re self-employed, have a low credit score, or have money in your bank that doesn’t obviously come from legitimate sources, you’ll be asked for more documents or to provide explanations. And your preapproval letter could take days or even weeks to arrive.
Whether or not yours is a straightforward case, you can speed things up by having some documents on hand when you apply for a preapproval letter.
Often, you’ll be able to upload these documents to a lender’s website within your application process or email them. So be ready to scan them or take pictures with your smartphone.
Preapproval document list
The documents you’ll likely need to start the home buying process include:
- Valid photo ID
- Last two years’ W-2s and/or 1099s
- Last two years’ tax returns
- Pay stubs for last 30 days, if applicable
- Statements from bank accounts, retirement accounts, and other asset accounts
- Divorce decree or separation agreement, if applicable
Don’t be surprised if lenders ask for more documents. It’s not always a bad sign. And it’s not in your interests to get approved for a mortgage you can’t afford.
Choosing a mortgage lender
Often, when you’re deciding how to start the process of buying a house, the most difficult part is choosing a lender.
Don’t stress too much about your choice at this point. Remember, you still have plenty of time to change your mind and go with a different lender later.
All you want at this point is an initial approval from one lender so that you can be confident when you shop for your home. Preapproval is not binding in any way and you can always apply with a different lender later on if you find a lower mortgage rate or faster closing time elsewhere.
Still, choose a lender that’s comfortable working with a borrower like you. Some specialize in people with great credit scores, high savings, and sound finances. Others are very comfortable working with those with shakier credit and fewer resources.
Note that some lenders charge for preapprovals while others don’t. Most of those that do charge something between $300 and $400. But check at the start how much, if anything, your lender will want.
Of course, if you think you have your ideal lender, it may be a false economy to switch to another just because of a preapproval fee. So think about it carefully.
Kick-start your home buying process
If you’re ready to move forward, don’t hesitate. At the time of writing, home prices were rising at record rates in the huge majority of markets in America. And hanging around could cost you serious money.
It couldn’t be easier to get started. Just click the link below.