You can use that time to pay off any debt you may have or correct anything that is impacting your credit score negatively (does not include student loans, regular credit purchases, etc). For the best interest rates, try to maintain a credit score of above 740.
1. Check Your Credit Score
This is not your typical credit score. First, some generic, online, credit score providers may not be accurate. Secondly, mortgages use a tougher algorithm when scoring resulting in a generally lower score. What you should do is spend about $60 and get your actual mortgage credit score or talk to a mortgage broker. Ideally, this should be at least 6 months before the time you intend to get the house. You can use that time to pay off any debt you may have or correct anything that is impacting your credit score negatively (does not include student loans, regular credit purchases, etc). For the best interest rates, try to maintain a score of above 740.
2. Get Prequalified
Prequalified means granting your lender access to your credit information to shop for credit offers, in this case, a mortgage. This is to allow the lender to determine the home value you can afford and prequalify you for that amount. If the lender requires a hard credit pull, they will always ask for your permission. The same is not required for a soft credit pull.
The metric in use for prequalification is the Debt-To-Income (DTI) ratio. For a Qualified Mortgage (loans that have stable features that make it more likely that you will be able to afford your loan), the Front End and Back End DTI are around 31% and 43% maximums. The preferred values are 28% and 36%.
A prequalification letter lets you know in theory what you can afford and is not an agreement to be lent the money just yet. It just helps when looking for a house to show the price range and seriousness to buy.
*Looking For A House
Looking for a house can also technically come in after pre-approval. The benefit of waiting for pre-approval is that sellers will consider your offers more seriously especially when you come up against cash buyers. However, pre-qualification shows that you can afford it and helps you start looking early enough.
Pre-approval is a big deal. It is when a lender independently determines that you meet the requirements for credit and sends you an offer. After this, you can decide whether to formally apply for and accept the credit offer from the lender. This involves the underwriting process where all the documents are verified. Documents include your personal identification documents, 1099, W2, tax returns, and all bank account statements.
If you had already found a house, an appraisal of the house can also be done. This is to ensure that the amount you have offered is reasonable for the house. Title Search and insurance are also necessary to ensure that there are no legal claims against that property.
The pre-approval process takes a minimum of about 21 days.
4. Any More Documents/ Information
Once issued with a pre-approval letter, the lender may still require some information from you. If you had not already found the house, the preapproval letter will be subject to valuation and the title search. You should be mentally prepared for a merry-go-round of clarifications. The lender may seek clarification for even the most minute of details and may take some time depending on the lender.
5. Cleared To Close
This is the final approval. You can now sit with the seller of the house and sign all the necessary documents. The attorney, mortgage broker, realtor, and a rep from the title company may all be there.