Getting Prequalified for a Home Loan
Question: what’s the first and most important thing you do before buying something? You check your wallet, credit card, debit card, etc. to see if you have enough money. Similarly, before you buy a house, you need to check and see that you have sufficient resources to afford it. This is called getting prequalified.
Banks are really only concerned with two things when it comes to lending money. The first is the ability of the borrower to repay the debt. This can be established with a simple questionnaire. What are your assets? What is your income? What are your debts? What are your expenses? To confirm your answers, a bank will ask to see bank statements, investment statements, paycheck stubs, W-2 forms, tax returns and other proof of income or assets.
The second thing a bank needs to know is the likelihood of a borrower repaying a loan. This information comes in a neat little package called a credit score. The most common credit score that banks use is called FICO score. FICO scores are available from credit reporting agencies based on your credit history. A high FICO score (i.e. 700-800+) is an indication that a person is likely to repay their debts, whereas a low score indicates a credit risk
With this information, the bank can now determine how much money a person can borrow for a home (if any). Knowing how much they’re qualified to borrow allows buyers to focus their search on homes they can afford. There’s nothing worse for buyers than finding a home they love only to have a bank tell them they don’t qualify for a loan. If you’re in the market for a home, the first stop you should make is to your bank to get prequalified for a loan.