Looking to prequalify for a home loan as a first time buyer? Learn more in this article by Jet Direct Mortgage.
Purchasing the home of your dreams is a great milestone, but the process of getting there can be overwhelming if you are a first time home buyer.
It involves multiple steps, from finding the right property to securing financing and negotiating with sellers, which can intensify in competitive markets like New York City where bidding wars pressure you into making quick decisions.
This is where the pre-qualification process comes in – this step in the home loan application process can give you a general idea of your buying power. It also helps you plan your home search accordingly, avoiding unnecessary emotional and financial strain.
But what does pre-qualification mean, and how can you prequalify for a home loan as a first time buyer? In this article, we will answer these and more questions to help you through the application process:
What is Pre-Qualification in Home Loans?
Pre-qualification in home loans refers to the initial step in which a lender evaluates your financial profile, including credit score, income, and debts, to give you an estimation on how much you are able to borrow.
As opposed to the pre-approval process, which tends to be more thorough and requires more extensive documentation, pre-qualification in home loans is quick and non-binding. However, it’s important to keep in mind that it doesn’t guarantee approval.
The key characteristics of pre-qualification can be summed up in the following:
- Informal Nature – This step of the application process is informal, aka it doesn’t guarantee approval and may not involve a hard credit check. It’s based on self-reported financial data.
- Loan Amount Estimation – When you prequalify for a home loan as a first time buyer, you will get an estimate of how much you will be able to borrow based on your financial situation.
- No Approval Guarantee – As we just mentioned, pre-qualification is not as extensive as pre-approval, as it doesn’t involve a detailed review of your finances or credit history. This also means it’s not a guarantee that you will be approved for the loan.
- Quick Process – This step of the prequalification for a home loan as a first time buyer tends to be quick, especially if you are applying online with an alternative lender. You can receive feedback as early as 1 day.
- Non-Binding – And last but not least, a key characteristic of this preliminary step is that it’s non-binding. In other words, there is no commitment on your end to accept the loan offer, nor does it lock you into any specific loan terms.
What Are The Benefits of Prequalifying for a Home Loan as a First Time Buyer?
If you are looking to prequalify for a home loan as a first time buyer, it’s good to know that there are multiple benefits that you can leverage from this process. Let’s take a look at some of them:
- It helps you set a realistic budget, and focus on homes within it
- Allows you to narrow down your home search, saving time and effort
- Boosts your confidence when shopping for a home and negotiating prices
- It signals to sellers that you are a serious buyer
- Allows you to explore options without a formal commitment
During this preliminary step, you may also be able to get insights into various mortgage products, such as FHA, VA, or conventional loans. Applying with a reliable and trustworthy lender such as Jet Direct Mortgage will allow you to find the right loan for you.
How To Prequalify For a Home Loan as a First Time Buyer
1. Check Your Credit Score
In order to prequalify for a home loan as a first time buyer, make sure to check your credit score in advance. You can do that by requesting a credit report from the major credit bureaus – Equifax, Experian or TransUnion, or via a financial app.
The required credit score will depend on the loan that you are applying for. For example, conventional loans require a credit score of 620 or higher, while FHA loans and VA loans can accept moderate scores between 500 and 580. Jumbo loans, on another hand, have stricter requirements, requiring a credit score of +700.
2. Collect Financial Information
The next step to prequalify for a home loan as a first time buyer will be to collect your financial information. This is important as it will give the lender an overview of your financial profile, and will help them estimate your creditworthiness.
Here is the information that you should gather:
Income
- Recent pay stubs (typically last 2-3 months)
- Tax returns (last 2 years)
- W-2 forms (last 2 years, if applicable)
- 1099 forms (for self-employed or contract work)
- Documentation of any additional income (rental, bonuses, alimony, etc.)
Debts
- Credit card balances and statements
- Loan statements (auto loans, student loans, personal loans, etc.)
- Mortgage statements (if you own other properties)
- Any other monthly debt payments (child support, etc.)
Assets
- Savings account statements (last 2-3 months)
- Checking account statements (last 2-3 months)
- Investment account statements (stocks, bonds, mutual funds, etc.)
- Retirement account statements (401(k), IRA, etc.)
- Documentation of any down payment gifts (if applicable)
3. Calculate Your Debt-to-Income (DTI) Ratio
The next step you’ll need to take if you are looking to prequalify for a home loan as a first time buyer is to calculate your Debt-to-Income (DTI) ratio. The DTI ratio measures the percentage of your monthly income that goes to debt payments.
Ideally, you should have a DTI ratio of 43% or lower – it shows that you have a manageable amount of debt relative to your income, suggesting that you are less risky in front of lenders. It demonstrates that you are able to handle less payments without financial strain.
4. Research Loan Options
When it comes to prequalifying for a home loan as a first time buyer, this preliminary step is also the perfect moment to explore different types of loans. Doing your due diligence will help you find the option that suits your financial situation best.
Some of the most common options include:
- Conventional Loans – Conventional home loans are mortgages that are not insured or backed by a government agency, such as the Federal Housing Administration. They can be used for primary, second homes, or investment properties.
- FHA Loans – FHA loans are loans that are government-backed, as they are insured by the Federal Housing Administration (FHA). This makes it easier for first-time and low-to-moderate-income buyers to qualify. These loans must be used for primary residence.
- VA Loans – These loans are specifically designed for eligible veterans, active-duty military, and some of their spouses. They are guaranteed by the Department of Veterans Affairs (VA), and must be used for primary residence.
5. Contact Lenders & Get Estimate
If you want to prequalify for a home loan as a first time buyer, the last step is to research lenders. Make sure to find an honest, transparent and reliable lender that offers unmatched customer service to find you the perfect loan – such as Jet Direct Mortgage.
Based on the information you provide, we will give you an estimate of how much you can borrow, which will help you determine your home-buying budget. Are you ready to get started? Apply now!
FAQ
How much can I borrow as a first-time homebuyer?
If you are looking to prequalify for a home loan as a first-time homebuyer, how much you can borrow depends on several factors, including your income, credit score, debt-to-income ratio (DTI), and the loan type you qualify for. Lenders typically prefer a DTI of 43% or lower.
The amount can also be influenced by the down payment you’re able to make. Generally, you can borrow up to 3-5 times your annual income, though specific amounts vary by lender and loan terms.
Does prequalification affect my credit score?
No, prequalification typically does not affect your credit score. It usually involves a soft credit inquiry, which gives lenders a basic view of your creditworthiness without impacting your score.
However, it’s important to note that prequalification is different from pre approval, which may require a hard inquiry that can temporarily lower your credit score by a few points.
How long does the prequalification process take?
The prequalification process typically takes anywhere from a few minutes to a couple of days. Many lenders offer quick online prequalification, where you can receive an estimate almost instantly after providing basic financial information.
In more complex cases, or if more details are needed, it may take up to a few days for the lender to evaluate your financial profile and provide a prequalification amount. So, if you want to prequalify for a home loan as a first time buyer, definitely keep this in mind.
What’s the difference between prequalification and preapproval?
Pre qualification is an informal estimate of how much you can borrow based on self-reported financial information, without a hard credit check.
Pre approval, on the other hand, is a more thorough process where the lender verifies your financial details, including income, assets, and credit score, through a hard credit inquiry. Pre Approval offers a more accurate loan amount and is taken more seriously by sellers.
What should I do if I don’t prequalify for the loan amount I need?
If you don’t prequalify for the loan amount you need, first review the reasons for the shortfall. You can work on improving your credit score, paying down existing debt, increasing your income, or saving for a larger down payment.
Alternatively, consider exploring different loan programs, finding a co-signer, or focusing on a less expensive home to meet your budget.
Experienced Chief Operating Officer with a 20 + year demonstrated history of working in the banking industry. Skilled in all aspects of the residential mortgage market . Strong business development professional with a Bachelor of Science (BS) focused in Business Administration and Management, from St. Joseph College. A direct endorsement underwriter and a licensed Mortgage Loan Originator.
