Preapprovals and First Time Home Buyers

Preapprovals and First Time Home Buyers

As a first-time homebuyer, you will certainly want the process of purchasing a home to go as smoothly as possible. One way you can help to ensure this is to get a pre-approved mortgage loan, but what exactly does it mean to get a preapproval and how do you go about getting one?

What is a Preapproval?

As the name suggests, a pre-approval means that you are approved for your mortgage loan before you ever make an offer on a home. This is different from being prequalified, as a prequalification simply means that you are likely to be approved for a loan, while a preapproval is the actual approval for a loan up to a certain amount.

What are the Benefits of a Preapproval?

Getting preapproved for a mortgage loan offers several benefits. One benefit is that you know before starting your house search exactly how much you will be able to afford and how much you will be approved to borrow. This can help you with determining your exact budget for your home, thereby allowing you to narrow down your options when conducting a search.

Getting preapproved can also help to increase your chances of getting the home that you most want. If a seller is considering multiple bids, the buyer with a preapproved loan is going to be more attractive because it is pretty much guaranteed that there will be no issues with obtaining a loan. Getting pre-approved also tells the seller that you are serious and motivated, which will also help you gain preference over other bidders.

How Do I Get Preapproved?

To get preapproved for a home mortgage loan, you will need to complete an application and provide all of the supporting documents. Documents that you will likely be asked to include are:

  • Current paycheck
  • Tax returns (from the previous two years)
  • Copies of bank account statements
  • Verification of the debts that you have

The lender will then look at your credit score while examining these documents to determine your debt-to-income ratio, your ability to come up with a down payment and the types of loan programs for which you will be eligible. In addition to the standard loans backed by Fannie Mae and Freddie Mac, first-time homebuyers may also be eligible for the following loan programs:

  • FHA Loan – backed by the Federal Housing Administration, an FHA loan requires a credit score of only 580 and a 3.5 percent down payment. If you have a credit score between 500 and 580, you may still be found eligible for an FHA loan, but you will need to have at least 10 percent to put down on the loan.
  • VA Loan – backed by the U.S. Department of Veterans Affairs, VA loans are available to active service members, veterans and the widows of veterans. A VA loan can be used to finance the full cost of the home.
  • USDA Loan – backed by the U.S. Department of Agriculture, a USDA loan may be available if you are purchasing a home in an area that is deemed to be agricultural, rural or within an urban revitalization zone.
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