It was July 2020 and the walls of Brittany Cormier and Nick Chaves’ rental in Cambridge, Massachusetts were getting closer – like a pandemic.
“We were so sick of looking at the four walls, sick of being so close to each other, we were both working from home. It was so tight,” Cormier said of their 700 square foot apartment. . “And at that point, we were just ready to put our money in a house and stop paying someone else’s mortgage.”
The couple’s first stop? The bank in their hometown to obtain a mortgage pre-approval letter, a document issued after a lender has reviewed a buyer’s ability to pay. He signals to the seller that buyers, especially first-time buyers like Cormier and Chaves, both aged 30, are able to get a loan.
“In our mind, we had to have it no matter what,” Cormier said.
After careful research, Cormier and Chaves have happily closed their new home in Lynnfield, a town 15 miles north of Boston. Before each offer, their lender and agent reworked the details of the pre-approval. After their long hunt was over, the couple moved quickly, Cormier said.
Nationally, there were four deals per home sold on average in February, according to the National Association of Realtors. At the same time, mortgage interest rates – while remaining close to historic lows – are rising as the country begins to emerge from the pandemic and the economy improves.
A pre-approval letter, or its less intense cousin, a prequalification letter, is now essential, experts say.
“If you don’t have a letter in hand when you go to buy a house, you might as well not do it,” said Christine Johnson, a real estate agent in Kansas City, Missouri. “,
Here are five things to consider before requesting pre-approval:
1. Check your credit report
Check your credit report to rule out any errors, which can take time. You can request it for free once a year from AnnualCreditReport.com.
“If there are any errors, challenge them to the credit bureau for correction,” said Greg McBride, chief financial analyst at Bankrate.
According to Bankrate, private or non-government-backed lenders often require a minimum credit score of 620 for a mortgage. The higher your score, the lower the interest rate that lenders tend to offer.
If your credit score is below 620, don’t give up. You can apply for a secured loan from a government-backed agency like the Federal Housing Authority or the Veteran’s Administration.
2. Are you ready to buy a house?
There are two types of letters: prequalification or pre-approval. Individual lenders set their own criteria, so be sure and ask what the process involves, advises the Federal Office of Consumer Finance Protection.
Prequalification is a lender’s less invasive look at your ability to pay, sometimes relying on information or estimates you provide to the lender.
If you want a first idea of what you can afford, prequalification can be a good first step, advises Teri Williams, COO of OneUnited Bank, the largest black-owned bank in the country.
“As you get closer or more focused and think ‘I’m going to buy something in the next three months,’ then you could move on to pre-approval,” Williams said.
3. Gather your financial documents
For approvals, a closer examination of your ability to pay, lenders perform what is called a serious credit check. So having your documents handy will help.
“Most lenders do most of the work they would do as part of a normal mortgage approval process,” McBride said. “They check your credit, check your pay stubs, check your income tax returns, they’ll probably check your employment with your employer. They’ll assess your other assets as well as your debts and calculate your debt ratios.”
Pre-approvals are generally valid for 60 to 90 days. Still, they don’t guarantee final mortgage approval, McBride noted.
4. Do your research
If you’re comfortable with a computer, use online affordability calculators and other tools, like mortgage rate comparisons, to gather information before contacting a lender, advises Williams of BancOne.
While lenders are happy to guide clients every step of the way, being armed with the right information can build a buyer’s confidence.
“In this process, you are the boss,” Williams said. “And you should have that confidence. Really ask questions and push people, because no one is doing you a favor by giving you a home loan. You are doing them a good deal.”
5. Consider your monthly and long-term budgets in detail
Dara Baker, an archivist who bought a townhouse in Columbia, Md. This month, said she considers all the possible expenses that buying and living in a new home could entail.
This included expenses that a first-time buyer might not even have known about, such as homeowners association fees.
“I had a very clear and specific number of what expenses I was willing to spend per month on everything including the mortgage, insurance, any HOA and also my utilities,” says Baker, 45. “Having this number in mind when I was looking for properties and where I was going to be, made a huge difference in what I ended up with and affordability.”
It’s good practice, said Mary DelRossi, the Massachusetts real estate agent who helped Cormier and Chaves. She tells customers to “breathe” if they’re tempted to offer a seller the maximum that a pre-approval allows.
“Are you still going to be able to travel – which neither of us can do right now – or eat?” said Del Rossi. “You want to enjoy life and not just live for your home.”
Lenders typically tie mortgages to monthly payments of less than 28% of a borrower’s gross income, or income before any expenses, McBride noted.
6. Once approved, don’t make sudden financial movements
While millions of people lost their jobs last year amid the pandemic, lenders have started checking employment two to three times before a final mortgage is taken out, sometimes on the day the deal was due. be concluded, says McBride.
“Don’t quit your job, don’t go buy a new car. Don’t even go out and buy a bunch of new furniture on credit,” McBride says.
These types of purchases – even paying off credit card debt – can be a red flag, noted Johnson, the Kansas City real estate agent.
“Call the lender first,” Johnson said. “Don’t do anything without talking to them until the loan closes, because it’s so sensitive.”
Rachel Layne is a Boston-based freelance journalist. Her work has appeared in the Boston Globe, CBS News, HBS Working Knowledge, USA TODAY, and other publications. Previously, she spent two decades covering multi-industry companies for Bloomberg News.