Are you looking to buy a home, but not sure where to start or what you can afford? Getting pre-approved might be the best way to begin the home-buying journey!

In the competitive market that the Minnesota real estate market is in, being pre-approved for a home before you begin your home search is pivotal to having a competitive offer. So, what do lenders look at when they are pre-approving a buyer?

Freddie Mac, one of the nations largest lending explains the pre-approval process with the “4 C’s” that help determine the amount you will be approved to borrow for your mortgage. The 4 C’s are just a few of the many things considered in the pre-approval journey. Understanding these 4 C’s will be helpful when discussing 

Capacity

What is your current, and future ability to make payments look like? Lender’s will look at your current and past income, employment history, savings accounts, monthly debt such as car, credit card, and student loan payments. This is sometimes called a debt-to-income ratio and will help a lender determine your capacity for paying your monthly mortgage payment. 

Capital or Cash Reserves

Lender’s will evaluate your liquid assets such as savings, cash, investments, and any other assets you may have. The more capital someone has, the more trustworthy they are to a lender that they can manage their money well and will be able to pay back the life of their loan. 

Collateral

Collateral is basically the value of the property you are looking to buy to use as collateral against the mortgage. 

Credit

Your credit history shows a lender that you pay your bills on time and can be trusted to make payments. Check out this article from Experian to learn ways to boost your credit score.

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Getting pre-approved is just one step of the homebuying journey and these are just 4 of the many different factors that are considered in the process. Talk to a Mortgage Lender to learn more about the preapproval process.