How to sell and buy a house at the same time
Should you buy or sell first? What’s a contingent offer? Get these answers and more in our guide to buying and selling at the same time.
Rosemary Avance, Ph.D.
You’ve already looked at online house listings 10 times this week. But if you want to make your dream home a reality, the first step is to get a mortgage preapproval from a lender.
Getting a mortgage preapproval tells you if you really are ready to buy a home and how much you can afford. It also makes you look like a serious buyer when you make your first offer.
Mortgage preapproval is conditional approval from a lender for a specified home loan amount. This means that you aren’t guaranteed a home loan, but it tells sellers you have been financially vetted by a lender.
Preapproval shows a seller that a lender has looked at your finances and conditionally approved a home loan.
When you first meet with a lender for preapproval, you provide financial documentation, like pay stubs and bank statements, that helps the lender decide the terms of a potential loan. One reviewer said they were given preapproval from a lender based on the buyer’s word and credit score alone.
Once you are ready to take out a loan, the lender will need to verify your financial information to make sure nothing has changed. The property must also meet the lender’s standards. If your financial situation changes or there is an issue with the property, the loan may fall through.
Although the terms are similar, pre-qualification and preapproval refer to two separate mortgage processes, and both have separate benefits.
“Unless you plan to pay all cash for a home purchase, obtaining a preapproval letter not only provides confidence to other parties that you can get a loan but also is a strong indicator to realtors that you are serious about buying a home and [not] just a lookie-loo,” said Daniel Kerr, a senior financial advisor at Running Point Capital in El Segundo, California. “Additionally, since the lender has already reviewed your financial documents during the preapproval process, [it’s] a shorter closing process.”
Here are some other benefits to getting preapproved for a mortgage before you start house-hunting.
When you are ready to start the loan process, a preapproval letter will make the whole thing easier. Here are the steps to take to get preapproval:
Take a look at your income, savings and debts to ensure you’re in a good place financially to buy a house. Calculate your debt-to-income (DTI) by adding up your monthly debt obligations and dividing it by your gross monthly income. Lenders will also do this calculation, but if you know your DTI ahead of time, you’ll be better prepared. You should also review your credit report for accuracy and know your credit score.
Read reviews from customers, and ask friends and family for recommendations for a mortgage lender. Try to talk with lenders on the phone before you apply to get an idea of which you’re comfortable working with.
Lenders evaluate several factors when you apply for preapproval:
Ideal lender requirements | |
---|---|
DTI | 36% or less; some lenders might accept a higher percent |
Credit score | 620+ conventional loans, 500+ FHA loans |
Income | Typically no set amount |
Employment history | Two years of steady employment in the same profession |
Consider applying for preapproval from two or three lenders to get the best rate. Many lenders allow you to submit information online or over the phone. Make sure you have your Social Security number handy and have thought about a down payment amount. Be prepared with hard or virtual copies of financial documents, including:
Your lender will verify the information you provide, perform a hard credit check and let you know whether you qualify for preapproval and at what amount.
You should seek preapproval just before you start searching for a home. Having the preapproval letter puts you in a position to make an offer once you find a house you want to buy.
Remember, the preapproval letter expires, usually in 60 to 90 days. If the expiration date arrives and you still want to buy a home, you’ll need to request preapproval again.
While it can be disheartening to put your homebuying plans on pause, your lender should be able to tell you which areas of your finances need cleaning up before pursuing homeownership. You can improve your credit score or work to increase your savings in the next six months to a year and apply for a mortgage preapproval letter again.
Preapproval letters are usually good for 60 to 90 days, after which you’ll have to go back to your lender to get it updated. The preapproval is based on your finances at the time of application, so it’s usually not a good idea to make big financial changes, like taking out a new loan or opening a new credit card, while you’re in the homebuying process.
The amount you're preapproved for is determined by various factors such as your credit score, income, employment history, existing debts and monthly expenses. Lenders use this information to assess your financial stability and determine the maximum loan amount they're willing to offer you.
If you’re serious about buying a house, then getting a mortgage preapproval letter should be your next step. Most real estate agents recommend you have a preapproval letter in hand before they start showing you houses — especially in competitive markets.
If you’re ready to start looking at homes, begin by researching lenders and learning more about each one’s preapproval process.
Should you buy or sell first? What’s a contingent offer? Get these answers and more in our guide to buying and selling at the same time.
Rosemary Avance, Ph.D.
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