Please don’t begin house hunting without a budget. You should not begin a home search without knowing what you can afford. You really should get a pre-approval letter from the bank before you do anything else. This way you know for certain how much you can put down on the home, and how much you can get approved for. Just because you can get approved by the way, doesn’t mean that you should spend the entire loan amount. See: Pre-Qualified vs Pre-Approved Loans.
It is wise to buy a house a little below your means rather than beyond. People have all sorts of ideas for how lenders determine how much you can afford. Some say that you can afford a house that totals to 3x your annual income. The point is, you need to figure out how much money you want to spend each month on a mortgage, and how much you have to pay for annual taxes, maintenance, repairs, and utilities. If any renovations will need to be done, you’ve got to factor those in as well.
You should check your credit history, if you haven’t been doing so already. Ideally, this is something you should begin doing a few years before you plan to buy a house. This way, you have time to fix anything on your credit report. You’ll also have time for inquiries to fall off before you house shop. Inquiries last on a report for two years. If, for example, you have five credit inquiries on your report, by the time they fall off, your score will go up 25 points. Each inquiry generally deducts 5 points from your overall credit score.
Lenders usually request credit reports from all three bureaus. These three bureaus are: Transunion, Equifax, and Experian. Lenders also will typically use your FICO score which is a carefully crafted combination of the three. People try to guess at how a FICO score is calculated, but really, it is a total mystery and cannot be predicted. Read: Get Your Annual Credit Report.
The higher your credit score, the better loan and interested rates you can get. You really should have a score of at least 750 to get the best rates. If your score is lower, and all other factors are normal, you can likely still get a loan, you’ll just be paying more than you would if your credit score were higher. Sometimes it might be smart to go ahead and wait to buy that house until your score goes up. For further reading, see: How Much Mortgage Can I Afford?
Then, you’ve got to go to the lender and ask for a pre-qualification letter. Pre-qualification letters are different from pre-approvals. Pre-qualification letters are a letter stating that the loan approval for a certain amount has been based off of your income and credit history; this letter lets you and the realtor know how much you can borrow.
A pre-approval letter, on the other hand, meanest hat a lender has already chosen the amount of money that they will give you for a loan after analyzing your financial information. Keep in mind that pre-approval is still not a total promise that the lender will actually give you the loan, but its the closest you can get, without actually applying for it, which you can’t do yet until you find the house.