You Don't Need To Find A Home Before Applying For A Loan

When your career is booming and a nice city catches your eye, you'll naturally want to put down roots and buy a home. You might even wish to fast track the process if your lease will be up in a few months. However, if you don't have a sizable nest egg saved up or it isn't enough cheddar for your dream build, you'd have to apply for a home loan — like the majority of American adults who own a house. But you might not look into it until you've found a house you want to bid on. Why put the cart before the horse, right? Well ... wrong. You don't need to find a home to apply for a loan and get pre-approved for a mortgage.

In fact, you'd be in a much better position if you secure financing before you go shopping. For starters, you'd already know the amount of money a bank, credit union, or another lender is willing to loan you. And knowing that limit will allow you to target homes that fall within your budget. This will help you set realistic expectations so you don't accidentally fall in love with that Malibu mansion. Plus, you won't be in a rush while being pre-approved (unlike when you're trying to close a deal). So, you can freely shop around and compare different offers, which can land you a reduced mortgage rate. Research by Freddie Mac reveals that individuals who compare at least two quotes can stand to save up to $600 a year. The potential savings are higher (over $1,200) for people who compare four or more quotes.

Besides being aware of your budget, there are other benefits of getting pre-approved. For starters, real estate agents will take you seriously and only show you homes that you can easily afford. This is because a pre-approval lets them know you're not shopping around aimlessly and are prepared to make an offer if you genuinely like a listing. Moreover, it'll cast you in a good light in front of sellers. And there's a good chance they'll prioritize your bid against other individuals who don't have enough cash and are yet to get started on their home loan journey — even if their offer is a little bit better. You'll be in a better position to negotiate and be ready to make instant offers too.

The entire home buying process from viewing a house and putting an offer on it to final adjustments and transfer can go smoother as well, since the closing process is fast tracked. Plus, you're less likely to run into unwarranted surprises, such as learning you aren't eligible for a home loan or the amount you were hoping for after you put down a deposit. If this happens, you could lose earnest money if the contract didn't include a clause for such incidents. With pre-approval, you become aware of the road blocks you'd have to deal with early on and can take remedial steps before you even view a property. Better yet, you don't have to necessarily take out a home loan if you change your mind or life happens.

If you want to get pre-approved for a home loan, the first thing to do is check your credit score. This will help you assess your eligibility and mentally prepare yourself for the interest rates it entails. For instance, with a credit score of 700 to 739, you have a good chance of securing a loan at a competitive rate. But if it's between 620 and 699, you'll have to jump through more hoops and bear a higher interest rate to borrow the same amount. You can request a free annual report from AnnualCreditReport.com. While at it, see what your debt-to-income ratio looks like. Basically, estimate how much of your monthly income you dedicate towards paying off prior debt. Generally, a range between 43% and 50% is considered good.

If you're in the clear, gather your recent pay stubs, W-2 forms for the past two years, IRS returns if you're self-employed, relevant bank statements, and acceptable ID. You also want to prepare a list of your assets, including investments, other properties, and 401(k) accounts. When you have everything, apply with the lenders you liked during your research. If all goes to plan, you should hear back within a few days and receive qualified pre-approved offers. Avoid making major life changes, though, like resigning from your job or taking out another loan, as the lender might rescind their offer and your loan may fall through. With that said, remember that a loan mortgage pre-approval is only good for so long – typically a maximum of 90 days. So, don't get this process started unless you're ready to buy a house soon.