Not all prequalifications are the same. Here's why and what you need to know about getting pre-qualified.
The uptick in first-home buyers is certainly one of the greatest success stories of last year’s property market rebound. With the interest rate a historically low 7% percent, and unchanged after the latest South African Reserve Bank Monetary Policy meeting, those looking to break into the property market could not ask for better market conditions.
Considering that first-home buyer applications increased to more than 70% between June and December last year, they are also able to afford far more home than this time last year.
According to BetterBond’s applications, the average purchase price for a first-home buyer increased by almost 10% in February, year-on-year. A buyer with a monthly salary of R25 000 is now able to afford a home of just over R967 000, with a monthly installment of R7 500.
The same buyer would have been able to purchase a property of just over R778 000 last year when the interest rate was at 10%. As there is no transfer duty payable on a bond of less than R1 million, a first-home buyer would only have to pay a deposit and the legal costs, a considerable saving that makes homeownership more attainable.
But buying a home can be complicated. And this is where Prequalification simplifies things. The process gives you guidance when shopping for your future home. While a prequalified mortgage does not guarantee a loan, there are several benefits for you, the borrower.
However, not all Prequalification’s are the same.
A quick prequalification is when you provide your income estimated expenses and then you are provided with an estimated price you can purchase for.
An in-depth prequalification is when an originator evaluates how much house you can afford based on a simulated application process. Lenders see if you meet the minimal requirements for a loan, and how big the loan should be.
Prequalification is ideal for people who are considering homeownership but who are not necessarily committed, whilst doing an in-depth prequalification will provide you with the more accurate number.
It involves some of the same steps as prequalification, though borrowers have to submit financial documents. One stipulation is that borrowers have to get a hard credit check. Originators review the information for a more precise idea of the amount home borrowers can afford.
Contacting a bond originator to assist you with a true prequalification process is about giving an identity to what otherwise is just another application. According to home loan provide Multinet going this route means "you do not get lost in a system, there is a champion representing you, and fighting for the best deal. Given that this is a free service, the use of this service is often a best-kept secret".
What Are the Benefits of Prequalified Mortgage?
It sets a clear budget
When you are looking for a home, it’s easy to get carried away looking at homes out of your price range. Prequalification keeps those urges in check. While you can still borrow the maximum amount, prequalification sets a realistic expectation for your budget.
During prequalification, a lender will give you a range for how much home you can afford. That way, you can stay within the estimate while house hunting. Remember, a mortgage payment is one part of a budget. Make sure you feel comfortable with the loan amount before proceeding.
It shows sellers you're serious
Whether you are a home buyer or a seller, no one wants to waste their time. Getting prequalified demonstrates to sellers that you’re serious about home buying. In some cases, realtors will insist on seeing a prequalification letter before showing you a home.
It's easier than pre-approval
Prequalification is simpler than preapproval. While both processes take one to three days, prequalification does not require as much paperwork. In most cases, a lender only needs your credit report and some bank statements. Loan preapproval is a more in-depth process, and requires evidence of debts, liabilities, other assets, and tax returns.
It saves time
The average homebuying process takes three to six months. Loan prequalification lets you chip away at that number. For instance, having an estimate for your loan’s value will keep you from looking at unnecessary houses. When it comes to negotiating with sellers, you will have a sturdier position knowing your budget, too.
Additionally, prequalification streamlines homebuying. The process requires you to get your papers in order in advance. It also gives you the chance to catch and dispute any errors on your credit report or financial documents.
What Do Originators Look for During Prequalification?
Prequalification takes into account several factors, ranging from credit profile to gross income. While each Originator has a slightly different way of calculating qualification, here is the essential information you’ll need:
- Gross income
- Credit score
- Proof of employment
- Monthly debt payments
- Ideal mortgage term and interest rate
- Records of Insolvency
How Do I Get Prequalified for a Mortgage?
Prequalification is the first step in the homebuying process. A word of caution, many online offerings and “do it yourself” pre-qualification tools are not accurate pre-qualifications but rather affordability calculators.
A true prequalification entails a fair amount of work and requires paperwork, a good bond originator or consultant can assist you in the process, they will assist you with:
- Checking your credit score
- Looking for defaults against your name
- Advise on the likelihood of approval
- Fix any errors in your documentation and application
- Identify your marriage status and advise on possible outcomes
- Advise on self-employed vs salaried requirements
- Discuss possible products that would suit first-time buyers
- Provide you with an accurate amount you can purchase for
- Discuss the hidden costs of buying a property
The Bottom Line
If home buying feels overwhelming, prequalification can make it more manageable. When you do a prequalification just using a calculator you are not taking into account your credit score, changes in your income and expenditure, bank polices that influence deposit requirements and the particular requirements of individual banks and lending institutions.
Prequalification gives home buyers a way to estimate how much home they can afford while simplifying the mortgage loan process - moving them one step closer to owning their dream home.
*Article sourced from Property 24*