One of the first things your real estate agent is going to ask you when you start looking for a new home is whether or not you have a pre-qualification letter from your lender. This letter is the first step in applying for a loan as it is the pre-approval letter that will actually grant you your desired mortgage after completing what seems like a mile high stack of paperwork.
So what exactly is the pre-qualification letter? And how does the lender decide what yours is going to allow? This letter is the compilation of consumer data that basically equates to a credit check. This letter does NOT verify your income, assets, or credit. In fact, the lender doesn’t even take that close of a look at your financials until you reach the pre-approval stage of the home buying process.
Let’s talk time. How long does it take to generate one? Because this letter really isn’t that involved or based on hard numbers, it is reasonably easy to obtain from your lender. We’re talking if you are writing an offer on Saturday, you SHOULD be able to get your lender to drop in your name, the addresses, and a few facts and figures and generate what you need to get the ball rolling.
Now let’s talk loan rates. It’s important to be aware of your credit score so that you can ensure the best loan rate possible when buying a new home. It matters because a credit score and history can lead to a lower rate on your mortgage.
What can you do to be aware of your credit score in case you need to improve it? It’s a good idea to request a free credit score annually from one of the major credit bureaus—Experian, Transunion, or Equifax—or to go to annualcreditreport.com to request your free report from a different agency every four months. If you select the latter route, they will send you a report detailing your payment history and amounts owed from each lender and credit card company. This includes your FICO score which is the magic number the mortgage companies use to determine your loan rate.
What is the FICO score? It ranges from 300 to 850 with 800+ being exceptional. If you have a rate above 800 you will likely be approved for the lowest loan rates automatically. A score that falls between 740-799 is very good and likely will result in the same low rate outcome, however, it is not as sure of a thing as the highest range. If you fall in the 670-739 category you are considered an acceptable lending risk and should be good to go. If you receive a score under 670, I would encourage you to try to raise your credit score before applying for a pre-qualification letter with your mortgage banker.
800+ - exceptional
740-799 - very good
670- raise credit score before applying
And while I am offering advise, might I lend a word to the wise? If you are in the process of buying a home, do not go and purchase a car or any other big ticket items before or during the process. Lenders have been known to shut down the loan process if a credit score changes too drastically as a result of these bigger purchases.
Thinking of purchasing a home in 2020? Hayden Hodges of US Bank Mortgage says planning ahead is always the the way to go.
“Getting pre-approved ahead of time instead of at the last minute is always advantageous,” Hodges said. “A lot of times potential buyers have no idea whether or not they have a credit issue by just pulling their credit score.”
Hodges says this is especially true for first time homebuyers and people who have not purchased a home in a while.
“It certainly helps all parties involved to go ahead and get your lending ducks in a row first and then start to looking for a home once you know what you are working with.”
Have questions? Call me so we can chat all things pre-qualification letters and credit scores. If I don’t have the answer, I will certainly find it for you.