The loan process can be a bit confusing. To help you understand how acquiring a home loan works, I am meeting with Sheryl Nolan today to demystify the lending process.
For more detailed information on loan approval, read what I learned about qualifying below. This is the first episode in a four-part series that will walk you through each stage of home buying. My goal is to make lending easy. Now, let’s learn whether prequalified or preapproved is better and why you need to know before you start your home search.
Preapproved versus Prequalified
The first step in acquiring a loan is understanding the distinction between prequalified and preapproved. When you get prequalified, you are providing a lender information like income and assets through an online loan application or over the phone. Based on this information, the lender can let you know what you qualify for.
Preapproved entails providing a lender more detailed information. Sharing paystubs, W-2s and other tax forms with a lender allows them to verify that you qualify for the loan you are interested in. Preapproval hold more weight in the buying process because it verifies a loan officer has seen financial information and approved the loan.
Buyers should get preapproved before beginning the home search. Sheryl goes so far as to call the listing agents for her clients to let them know all of the documents have been reviewed and affirms that you are a solid buyer. This phone call can me tremendously effective if you are competing against other buyers.
Important TermsYou may have heard of the debt to income ratio. This just means that your income is compared to your debt. Debt includes things like school loans, credit card debt, and car loans. This ratio is important in the home buying process because different loan programs have different numbers they have to go by to get you approved.
Another term you may not be familiar with is front end ratio. The front end ratio is just your new housing debt. On the other hand, back end ratio includes new housing debt plus all of your other debts.
Credit score is also important. To come up with this number, the loan officer pulls your score from the three different unions: Experian, TransUnion, and Equifax. The middle score is what they look to as your credit score. This score will help determine what your interest rate will be.
Be sure to get preapproved before you begin your home search. Completeiing this step at the beginning allows you to go into your home search knowing exactly how much house you can afford.
Tune in to our next episode of Demystifying Lending to continue learning about the home loan process.