Get the Most Out of Your Home Loan

Home Loan Pre-ApprovalGuest post by TJ Freeborn, Discover Home Loans

The search for a new home comes with a lot of questions. One of the most important questions to ask yourself is: “How much home can I comfortably afford?”

One way to answer that question is to get pre-qualified for a home loan. To do this, just provide your mortgage professional with some information about your income, savings and monthly expenses, and you will receive an estimate of how much home you can afford.

Pre-qualification can be a good starting point for determining your price range, but it does not guarantee a loan or that a lender is committed to working with you.

Pre-approval, on the other hand, means that a lender has reviewed your credit report, verified your income and assets and determined a specific amount it will be willing to lend you, providing certain conditions are met. Pre-approvals help you shop for your new home with confidence. They greatly reduce any financing surprises and generally give you a leg up in buyer and seller negotiations. Additionally, many real estate agents who are representing home sellers will want you to be pre-approved so that they know you are a viable buyer.

To become pre-approved, you will need to provide your mortgage professional with financial documents including W2s, paycheck stubs and bank statements. Your mortgage professional will use these documents to verify your income and assets and also perform a credit check. Once this review has been completed, your lender will issue you a formal pre-approval letter that you can then share with your real estate professional and sellers.

The Loan-Worthy Look

How can you be sure your finances and credit profile are looking their best? Keep your down payment and credit score in mind and try not to open new lines of credit.

Your down payment plays a large role in the purchase of your home. Depending on your loan, your down payment may be between 3 and 20 percent of the purchase price —that’s between $6,000 and $40,000 due at closing time for a $200,000 home.

Consider saving a set amount each month to save for your down payment. Make saving easier by having money deposited from your paycheck into a special, down payment savings account. Some accounts, like Discover Bank’s AutoSavers Plan, are designed to do just that.

Looking for other ways to afford a down payment? Consider some other sources:

  • Your 401(k). Some 401(k) programs allow you to borrow money for a new home purchase.
  • IRA accounts. Many IRAs have provisions that allow withdrawals for a first-time home purchase.
  • Monetary gifts. Depending on the terms of your loan, a gift can sometimes be used toward your down payment.

Settling the Score

Your credit score is one of the key factors that lenders look at when deciding whether they will lend you money to buy a home. It also plays a factor in determining your interest rate.

Typically, a high credit score will get you a lower interest rate on a loan. Knowing your credit score can go a long way toward helping you make the most of your home purchasing power. Start by getting a copy of your credit report, available from each of the three major credit-reporting agencies. If you pay a small fee to the reporting agency, the credit report you receive will also include your credit score. Separately, some credit card companies will list your credit score on your monthly statement. This will give you a general idea of your credit score when you eventually apply for a loan.

Worried about your score? You can help boost it over time by:

  • Correcting errors on your report by reporting them to the credit agency
  • Reducing or paying off outstanding debts
  • Making payments on time
  • Continuing to use at least one credit card, but paying it in full each month
  • Not taking out new loans; the lower your debt to income ratio, the better

About TJ Freeborn and Discover Home Loans

TJ Freeborn is a mortgage professional at Discover Home Loans, where she confers with mortgage bankers and consumers to understand current industry trends and consumer-facing lending issues. Discover Home Loans, a subsidiary of Discover Financial Services, is a source for consumers seeking prime variable- and fixed-rate conventional, FHA and HARP home loans from a trusted name in the financial services industry.

Note: This is a guest post; the views and opinions expressed are those of the author and do not necessarily reflect the opinion or position of Redfin.