How To Prequalify for a Home Loan: Essential Tips You Need To Know

hands around a house showing how to prequalify for a home loan

3 Tips On How To Prequalify for a Home Loan

Not sure if  you know how to prequalify for a home loan?  You’ve made the decision to dive into the world of home ownership. As a result, there is so much to learn and do, but the most important is securing financing.

Keys in homeowners hand

A housing loan differs from a typical personal loan and comes with additional responsibilities.

Before you begin your search for the perfect home, you will want to look into getting pre-qualified. Moreover, this step will look at your finances and determine how much money you can borrow.

Continue reading for three tips on how to pre-qualify for your new home purchase.

1. Get Your Credit in Order

STOP!

Before you look for a lender to see if you can pre-qualify for a housing loan, check your credit.

Each year consumers can receive a free credit report from the top credit bureaus. Often, there is a charge for your credit score so prepare to pay a few dollars for the information.

Here is how you can contact them:

Equifax – www.equifax.com. P.O. Box 740241. Atlanta, GA 30374-0241. 1-800-685-1111

Experian – www.experian.com. P.O. Box 2104. Allen, TX 75013-0949. 1-888-EXPERIAN (397-3742)

TransUnion – www.transunion.com. P.O. Box 1000. Chester, PA 19022. 1-800-916-8800

Review the Reports and Contest Incorrect Information

Your credit history will play a huge part in whether you qualify for a loan or not. It will also affect the interest rate you receive.

If there is incorrect data on the reports, file a request with the bureau reporting the information to have the discrepancies removed.

2. Determine What Type of Housing Loan You Want

There are different types of mortgage loans you can use to purchase a house. In fact, each has its own pros and cons. Consequently, here are some popular loan programs.

Conventional – This is the most common home loan because it is less restrictive, however it may require a bigger down payment.

home and money

Federal Housing Administration (FHA) – Popular among first-time home buyers, FHA loans, backed by the federal government require mortgage insurance to protect the lender if you default on the loan. They also require lower down payments.

USDA – These loans are backed by the United States Department of Agriculture. They are geared towards individuals who may not qualify for traditional financing. They also do not require a down payment.

VA – VA loans are mortgage loans extended to active-duty and retired military personnel, as well as surviving spouses. Above all, these loans are backed by the Veterans Administration.

3. Structuring Your Loan

In addition to determining which housing loans you may qualify for, you will also need to consider how you want your loan structured.

progress steps one through four

Fixed vs. Adjustable Rate

A fixed rate mortgage means you will pay the same interest rate throughout the full term of your loan.

Adjustable Rate Mortgage (ARM) usually has lower rates than fixed rate mortgages for the first five years. The rate will then increase. ARMs are riskier than most loans.

The next consideration is repayment years. Mortgages typically come with 15 or 30 year terms.

Now You’re Ready to Get Pre-Qualified

Now that you know more about how to prequalify for a home loan and understand the loan process, you can start your home-buyer journey.

Credit Squared has a wealth of information. If you have personal finance questions, contact us today. You can also subscribe to our newsletter for the latest information.

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8 Comments

  1. Hi Patrick,

    Great tips!

    How to prequalify for a home loan is something that everyone should learn about!

    Excellent work on thoroughly explaining each step such as checking your credit score and determining what kind of home you want. 

    Particularly the information about FHA loans and how they are perfect for first time home buyers because they require lower down payments.

    I really learned a lot from your page. 

    Keep up the good work!

    • Thanks for you comments.

      Happy you found the article helpful.

      Prequalifying for a home loan is an extremely important step in the home buying process.  Not having a preapproval before searching can set up roadblocks to getting the home of your dreams.

      Imagine finding the perfect house and then being denied financing because you have derogatory information on your credit report or a bad credit score.

      FHA loans are the perfect loan product for first time home buyers as they are extremely flexible regarding down payment requirements and lower credit scores.

      The most important things you need before you start home shopping is having financing in place, knowing what you can spend and the type of loan product that’s best for you.

      All the best,

      Patrick

      Creditsquared.com

  2. Great information this article is. 

    Very helpful having all of this information all in one place 

    It is funny how you forget the basics after living in a home for over 30 years. However it is time to help some others. This came right in time. 

    The different loans available will help one of my grand kids. 

    Thanks for such a great article. 

    Hope the interest rates hold. How about you?

    • Thanks Robert,

      Happy to hear that you found the article informative.  Even happier to hear it will help someone else out.

      If I didn’t work in the industry, I would forget the basics as well.

      Of all the available loans, I recommend your grand kids have a look at an FHA loan.  It’s easier to qualify for and requires a much lower down payment than conventional loans.

      I’m hoping that interest rates hold as well.  It impacts our business, as consumers hold back from home buying when rates get to level where it’s just too expensive.

      Keep and eye on the 10 year treasury note (it’s near 3% now) if it breaks support then I think we will see mortgage interest rates rise.

      With the economy growing and with early indications of higher inflation, the Federal reserve is more than likely to raise rates.

      All the best.

  3. Hi Patrick! Your page is simple yet very informative and easy to understand.

    When I purchased my first home it was scary and didn’t have access to this kind of information so that we could be better prepared.

    Aside from using my own personal bank, what would you recommend begin looking for financing?

    • Hi Annie,

      It can be a little intimidating the first time you buy a home.  There are lots of new terms and processes to understand.

      If you have a friend or relative that has recently purchased a home, you might ask them about their experience and if they could recommend someone.

      I’d also go online and apply at bankrate.com and quickenloans.com and see what kind of offers they come up with.  Go with a brand you recognize and you should get a good offer.

      All the best.

  4. Very informative article!

    I figured my credit score would play a key role with obtaining my loan. Now I know it’s also important to pre-qualify for a home loan as well.

    What should ones score be before they even think about applying? I also use credit karma to check my score. Is this acceptable?

    Also would you suggest a fixed interest rate or an adjustable one?

    • Having a good credit score and getting pre-qualified for financing go hand in hand when you are looking to buy a new home.

      Every lender has their own thresholds for credit scoring before you are approved for any loan.  Typically a credit score of 750 or above gets you the best rates for conventional loan financing.

      A FICO score of 580 or higher could get you into an FHA loan.  FHA is great for first time home buyers as they don’t require a large down payment (580 and above).  The downside is that rates tend to be higher and you will have to pay upfront MIP.

      I’d start looking at fixed rate loans and lock in before rates go much higher.  Going with an ARM product may seem cheaper, but in a rising rate environment you will see more frequent rate adjustments and higher payments over time.

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