Thinking of buying a home? Let Business Insider clear up five common misconceptions about the process.
Nothing seems to trip up first-time homebuyers more than pre-qualification agreements.
Often confused with a loan pre-approval, the pre-qualification is an estimate of how large a mortgage you can afford based on your financial situation over the past two years.
"It's important because it helps you narrow down your options and focus on how much house you can really afford," said Erin Lantz, director of Zillow Mortgage Marketplace. "But it's not a commitment between you and the lender whatsoever."
For serious homebuyers, the pre-qualification process represents an important first-step prospective buyers tend to overlook. But as lending guidelines have gotten more strict, it's crucial to know where you stand before setting your sights on a McMansion you just can't afford.
With Lantz's help, we've outlined some common misconceptions first-time homebuyers typically have about pre-qualifications.
It's the same as a loan. "First-time homebuyers tend to think pre-qualifications and loans are one and the same, but they're not," said Lantz. "Once you're approved for a loan, that's a commitment."
You don't need to research the lender. The pre-qualification will help determine your mortgage, so you'd do well to find a lender who puts you at ease, Lantz said. "You want to talk to one with really high ratings and reviews, who's experienced in the industry and can explain things thoroughly." Put simply, you're looking for an advisor to coach you through the process.
You're obligated to work with the lender who provides it. "Just because you choose one lender to work with doesn't mean you'll have to use them to take out the loan," Lantz said. Most lenders will encourage you to work with them on the mortgage, but by no means should you feel obligated to.
More misconceptions after the break.
You don't need to prepare. First-time homebuyers should always prepare for a pre-qualification just as they would for securing a mortgage, said Lantz. Even though they're not often not required to bring paperwork, "the more precise they can be, the more precise the lender can be to them about what size mortgage they can afford."
Here's what you'll need: Last month's pay stub or other proof of employment; tax returns from the previous two years (if you're self-employed) and a credit report from all three bureaus — Experian, TransUnion and Equifax.
It's OK to fudge a little. "This is never OK," Lantz said. "I tell all first-time homebuyers they have to be forthright and accurate." Otherwise you'll risk damaging your credibility and your shot at the mortgage (and home). Tell the lender everything they'll need to know, from any rental properties you've owned to what's really lurking on your credit report.
And speaking of credit, make sure you're paying all your bills on time. Lenders aren't keen on delinquent bills or unstable unemployment.
"Your goal is to show your financial picture has remained consistent over the past two years," said Lantz. "You want to keep your profile in tip-top shape."
— Jill Krasny
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