A good first step in getting a mortgage is getting pre-qualified. This takes the shape of a "pre-qualification letter" from a mortgage lender, stating that you qualify for a loan of a specific amount.
The benefits of pre-qualification:
- You get a preliminary sense of how much money you'll be able to borrow.
- You can show the sellers of the home you want that you're able to afford it. This is a good way to set yourself apart from other potential bidders. This becomes a virtual necessity in a hot housing market where sellers get multiple bids and look for any reason to pick one buyer over another.
In order to get pre-qualified, you need to work with a mortgage lender or through a mortgage broker. You will need to supply information on your assets, income and debts. These may take the form of paycheck stubs, W2 statements, and bank and investment account statements. Your assets will substantiate that you have sufficient funds for a down payment and closing costs. Some lenders and brokers request authorization to order your credit report, which provides information about your debts and credit worthiness. Based on your financial profile and current interest rates, the lender or broker will indicate in a letter how big a mortgage you can afford. The key here is that the more complete a picture you provide, the more confident you can be that there won't be problems when it's time to close on your purchase.
You should know that pre-qualification is not a commitment from the lender. It is only an opinion which they could revise based on changing interest rates or a more thorough review of your finances. For more of a commitment, you can get "pre-approved."
Pre-approval means a lender has gone through all of the steps they would normally take to finance your mortgage - e.g. reviewed all of your tax statements, credit records and other documentation - and is ready when you are to finance your mortgage at the rate specified. For this reason, a letter of pre-approval is a more definitive indication of what you can borrow and a much stronger message to a potential seller.