House Hunting? What To Know About Pre-Qualifying For A Home Loan

Buying a house is likely one of the largest purchases you’ll make in your lifetime, and homeownership comes with a whole host of new responsibilities. Feeling daunted by the home buying process is only natural, especially when you factor in expenses like saving for a down payment for a house or covering closing costs. One way you can more confidently move into your role as homeowner is working with a local mortgage lender on pre-qualifying for a home loan. Depending on the lender you’re working with, this initial step may be referred to as the pre-approval process, but either way, both are a valuable opportunity to assess your financial readiness and determine your eligibility for a potential home loan. Rivers Edge Bank’s pre-qualification process is designed to prepare you for your home purchase and set you up for success as you begin managing your mortgage payments.

What To Expect When Pre-Qualifying For A Home Loan

If you’re just getting started on the home buying process, pre-qualifying for a home loan is a great place to begin. Pre-qualification is a preliminary estimate of how much you can borrow based on the information you provide to a lender. Think of pre-qualification as kickstarting your loan application. It's a relatively quick, simple process that typically involves sharing your income, debt and assets to give you an idea of how much you can afford to borrow and show potential sellers you’re a serious buyer. Your lender may request documentation of your financial status, such as pay stubs, tax returns, bank statements and a credit report.

The process may vary slightly depending on the lender, but typically you can expect a hard credit pull as the lender assesses your credit history and determines your credibility as a borrower. A credit pull does have a slight impact on your credit score, so make sure you’re serious about purchasing a home before initiating the pre-qualification process. If you’re shopping around for different loan options, you typically won’t be penalized for subsequent hard credit pulls for two weeks up to 45 days from the first inquiry depending on the credit score model used, as all pulls during the designated timeframe count as one. The lender will let you know how much you qualify for and provide you with a pre-qualification letter you can share with your realtor to give you a foot in the door for your dream home. Pre-qualification can also give you a better idea of the home loan options available to you before you need to make a final decision.

Keep in mind: pre-qualification does not guarantee you a loan offer. Once you choose a lender, there may be more back and forth with them as they request up-to-date proof of income and other necessary documents closer to your loan start date. Our trusted local mortgage lenders at Rivers Edge Bank walk you through each stage of pre-qualifying for a home loan and the home buying process so you can navigate the next steps in your journey confidently. Taking the time to understand your borrowing capacity enables you to calculate how much you need to save for a down payment and what homes are in your budget.

How Much Down Payment For A House Is Enough?

You may have heard that a 20 percent down payment for a house is the standard for buying a home—and it is certainly a great goal. Putting 20 percent down can help you avoid private mortgage insurance (more about that later!) and reduce your monthly payment. However, if that’s not feasible, don’t worry. There are loan programs that allow qualified buyers to put down as little as three to five percent depending on the guidelines. Your lender might even have grant programs available to help you meet the down payment and closing cost requirements, so be sure to ask if you qualify for any special programs.

Depending on the size of payment you’re required to put down, if you’re looking at a $200,000 house, a three percent down payment would only be $6,000, and the loan amount would be $194,000. But if you make a bigger down payment—say 20 percent, equaling $40,000—you’d only have to borrow $160,000, which would lower your monthly mortgage payments and reduce your interest costs. Be sure to balance how much you’re able to save for a down payment with how much you’re willing to pay monthly for a mortgage so you don’t get into a position where you’re unable to set money aside for other future goals.

When considering buying a house, lenders will work with you to see if you qualify for a loan. Among other things, they’ll factor in how much you earn, how much you owe on other loans and what your additional regular monthly expenses are. If home ownership is your goal, connecting with a local mortgage lender is a great first step to explore your options and understand what it takes to make it happen. One potential consideration depending on how much you save for a down payment is private mortgage insurance.

What Is Private Mortgage Insurance?

If the financial institution you’re working with allows your down payment for a house to be less than 20 percent, that lender will likely require you to carry private mortgage insurance, or PMI, as part of your monthly mortgage payment. The cost of this insurance will vary depending on your down payment and credit score. Consider private mortgage insurance an extra protection lenders require so they can still feel comfortable giving you a loan even if you aren’t quite at the threshold of 20 percent down.

See How Your Savings For A Down Payment Affect Your Mortgage

Online home buying calculators can help you get a feel for what mortgage payments will be based on the cost of the home and how much of a down payment for a house you’re able to save for. As you enter different down payment amounts, you’ll notice the total cost of the loan will go up or down, translating to your monthly mortgage payments. When you’re ready, talk to a trusted local mortgage lender about getting pre-qualified for a loan to establish a baseline for what you can afford. However, beware you may qualify for a bigger loan than you can comfortably afford. Don’t forget to factor in other expenses that won’t go away when you buy a house, like utilities, groceries, loans, child care and more.

A good indicator is putting together a spreadsheet that factors in mortgage payments, all of your other expenses and your income to determine if you’re comfortable with the final numbers. Are you left with any savings? Many experts recommend that you spend no more than 25 to 28 percent of your take-home pay on monthly house payments, including the extra costs of home insurance and property taxes. For example, if you’re bringing home $80,000 per year, 28 percent would equal payments of no more than $1,867 per month over the term of the loan. That’s equivalent to a $200,000, 30-year fixed-rate loan at an interest rate of 6.75% including property tax and home insurance estimates.

Does that limit you to a $200,000 house? No, but you’ll have to make a down payment big enough to bring your loan to that amount. That’s at least $20,000 down on a $220,000 home or $50,000 on a $250,000 house. You’ll also need to factor in one-time closing costs—which likely will run several thousand dollars—and moving costs. Go ahead and dream about that new house—and make sure the reality fits comfortably within your lifestyle and budget.

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Let Your Local Mortgage Lenders At REB Simplify The Home Buying Process

Planning ahead for the home buying process is one of the best ways to set yourself up for a smooth experience from house hunting to putting an offer down. Whether you’re still saving for a down payment or ready to start pre-qualifying for a home loan, Rivers Edge Bank is your partner on the journey. As a local mortgage lender, we have experience helping fellow community members find and afford their dream home in the same communities we’re proud to call home. Speak with one of our lenders to learn more and explore home loan options available to assist you on your path to becoming a homeowner.

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