Thinking About Buying a Home This Year? Do This Right Now

Warmer weather usually leads to an increase in people looking for a place to call their own. The low housing inventory of the last few years has made things challenging for would-be buyers as the homes on the market fetch high prices due to increased competition.

Things are starting to improve with housing inventory rising over the last few years, especially in the summer months. But bidding wars still happen. That's why savvy buyers are already taking this step to prepare for prime home-shopping season.

How much home can you buy?

Most people don't have enough cash to buy a home outright, so they need a mortgage. Mortgage lenders look at your income and credit history to decide how much they're willing to lend to you. If the price of the home is greater than the mortgage you qualify for, you'll either have to pay cash to make up the gap or look for something that better fits your budget.

This mortgage issue might seem like it's mostly a problem for buyers, but it can create issues for sellers too. Someone might make a great offer, but if they don't actually have the funds to back it up, the seller's home will continue to sit on the market and they could miss out on other potential buyers.

That's why it helps to get pre-approved for a mortgage before you even go looking for a home. This is where you have a bank evaluate your credit and finances to decide how much it would be willing to lend you if you found a home you wanted to buy.

The lender will give you a letter of pre-approval, which you can then show to the seller to prove you have the funds to back up your offer. This doesn't mean they have to sell to you. But it could help set you apart from other buyers, especially if the seller wants to get rid of their house quickly.

It's worth noting that a mortgage prequalification is not the same as a pre-approval. A prequalification is similar, but it's less accurate because lenders don't pull your credit history or look at your finances in as much depth. Whenever possible, a pre-approval is the way to go.

How do you get pre-approved for a mortgage?

First, you must gather all documents related to your income, assets, and financial history. This includes proof of income and details of your employment history for the last several years. You'll also need to provide your Social Security number so the lender can check your credit and ID to prove you are who you say you are. Lenders may also request your tax returns from the last few years.

Next, you have to decide which lender you'd like to work with. You may want to compare mortgage rates from a few companies to see which offers you the most money or the lowest interest rate. If you plan to check out multiple banks, aim to get all your mortgage pre-approvals done within about a month of each other. Then, all the credit inquiries count as a single inquiry on your credit report.

The bank will review your application, which can take some time. If it decides to work with you, it will issue you a letter of pre-approval indicating the maximum amount it will lend you and the interest rate it would charge you. You can show this letter to home sellers to strengthen your offer.

Just note that mortgage pre-approvals don't last forever. They're usually only good for 60 to 90 days. If you haven't found a home you like in that time, you can request an extension. Talk to your bank to learn how to do this, and don't be afraid to reach out if you have other questions about your mortgage pre-approval.