Getting prequalified for a mortgage is the best 1st step in the home search process. Many sellers will only permit people to see the home if they have taken this step; also, a Prequalification letter from a lender is required to make an offer.
Here is a fast way to prequalify yourself to get an idea of what you would most likely see once you call a lender.
- Determine how much total cash you have on hand right now to buy a home, as this is what would be used for the down payment on the mortgage and the “closing costs”? These are the added expenses people sometimes overlook. Prepaid taxes, fees, title insurance, HOA fees, inspections, and the lender will also have added costs for appraisal and escrows.
- What is the amount per month that you want to stay within? Your monthly mortgage payment will include an escrow for next year’s taxes.
- What is your current credit score?
Once you have done this, here is a rule of thumb to estimate how much of a mortgage you may qualify for
Use $500 for every $100,000 of the mortgage.
So, if you have $25,000 cash to work with, set aside $7500 for the closing cost, which leaves $17500 for a down payment.
If you also want to keep the monthly payment to $1500, you should have at least $500 of the monthly payment will be the escrow for taxes, leaving $1000 for the mortgage or roughly a $200,000 mortgage. In this scenario, with $17,500 to be used as a down payment, the most you should consider looking for are homes of $217,500 or less.
In conclusion, getting pre-qualified for a mortgage is an important step in the home buying process. It can help you determine your budget, show sellers that you are a serious buyer, and speed up the loan process. Don’t forget to get pre-qualified before you start looking for your dream home.
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