To confirm loan eligibility before purchasing a home, potential buyers should first review their credit score and debt-to-income (DTI) ratio. A credit score of at least 620 is typically required for conventional loans, while scores below 580 may limit options. Lenders use DTI to assess repayment capacity, generally requiring a ratio below 43% for conforming loans. obtaining a pre-approval letter from a mortgage lender is critical, as it outlines the loan amount, interest rate, and terms the buyer qualifies for. Additionally, reviewing down payment requirements and understanding closing costs, which can range from 2% to 5% of the home price, ensures affordability. Loan types such as fixed-rate or adjustable-rate mortgages should also be evaluated based on long-term financial goals.

The steps above are essential because they mitigate financial risks and streamline the homebuying process. A credit score below 620 can increase borrowing costs significantly; for example, a score of 620 might qualify for a 4.5% interest rate on a 30-year fixed loan, while a score of 740 could secure a 4.0% rate, saving over $100,000 in interest over the loan term (Fannie Mae, 2023). A DTI exceeding 43% may result in loan denial or higher rates, as lenders view higher debt as a risk. Pre-approval not only boosts negotiation power but also reduces time spent on unaffordable properties, shortening the home search by up to 30% (National Association of Realtors, 2022). Loan type selection impacts monthly payments and flexibility; adjustable-rate mortgages (ARMs) offer lower initial rates but pose long-term uncertainty, while fixed-rate loans provide stability. Closing costs, often overlooked, can delay transactions if unprepared, with 18% of buyers underestimating expenses (Consumer Financial Protection Bureau, 2021). Together, these steps ensure buyers secure sustainable mortgages and avoid default risks, which remain elevated in regions with rising home prices and interest rates.