Looking to buy your first home? Here's why (and how) to get pre-approved for a mortgage

When making the decision to purchase a home, the first thought that comes to a buyer's mind is most likely "how much can I afford?"

If you're a seasoned buyer who has already been through the process and purchased a property, figuring this out might feel like a breeze. But if you're a first-time buyer, it can be challenging to determine where to even start.

This is where getting pre-approved for a mortgage comes in.

If you don't know, a pre-approval is a document from a mortgage lender that states they are tentatively willing to lend you a certain amount of money based on a variety of factors. While getting pre-approved does not guarantee you a loan offer — a home appraisal is usually required before a lender will finalize a mortgage's terms — it gives you a better understanding of what you're able to afford.

Why is it important to get pre-approved?

Rick Borgo, managing broker of Anywhere Lending in Verona, said that when deciding to purchase a home, the first thing you should do is make a budget, which includes determining what you can spend monthly and what savings you have available. Then, he said, the very next step you should take it getting pre-approved for a mortgage.

"It's going to determine what purchase price range you're going to be able to afford or what the bank will be willing to lend you," he said. "Then, number two, the pre-approval letter is normally submitted in your offer package. So, when you submit an offer to a seller, it's kind of like a vow of confidence to the seller that you did speak to a bank and they're tentatively willing to lend to you based on the purchase price you're offering."

Having a pre-approval letter ready will make it easier for you to look for houses within your budget, and it will also ensure that you're prepared to make an offer when the right home comes along.

How does the pre-approval process work?

Borgo said there is not a standard method for getting pre-approved and that the process may vary depending on the lender you speak to.

He said that while some lenders will just require you to complete an application and they will run a credit report, other lenders have a more detailed process, like requiring an application and running a credit report, as well as collecting income and asset documentation to verify financial information.

"There's even a third or fourth category of lenders that you may be able to just have a conversation with and because they know their way around the mortgage business and they've been doing it a while, they may have a spreadsheet or something in excel that they take notes in and plug in numbers while you're having a conversation. And, they may pre-approve just based on a conversation, believe it or not," he said. "So, there's no set process because every lender varies in that regard."

How do you find a lender to get pre-approved?

You can find the right lender for you just like you would find the right person for any service: take the time to research and check reviews, Borgo said.

"In terms of looking for a lender, I would always check Google reviews. Ask for a referral from a friend or real estate agent you may know in your family," he said. "It's just kind of like you do your research for anything."

Borgo said it's important to speak with several different lenders before deciding who you'd be most comfortable working with. While some people may prefer a lender who is strictly professional, others may prefer a lender who will get to know them on a person level, he said. Because of this, you should take the time to shop around before settling with someone to work with.

"It really comes down to what you're looking for as the buyer or as the consumer in your lender because it is a process," Borgo said. "You are going to be working hand-in-hand with somebody day-to-day, so it's important that you're comfortable with them."

How long are pre-approvals valid for?

As a general rule of thumb, Borgo said, pre-approval letters are valid for about 90 days. But, if you make a big purchase, like getting a new car or taking out a personal loan, the amount you are pre-approved for will be affected, and therefore you'll have to get that letter updated, he said.

"The pre-approvals though, you could always have them update it with another conversation with your lender or if you provide them additional documents," he said. "So I try not to have people sweat like the expiration date too much because it is really just a simple process to update it for another 90 days."

What are your tips for first-time buyers looking to get pre-approved?

While a pre-approval will give a good estimate of how much a lender will be willing to loan you, it will often show the maximum amount that the lender may approve you for. Because of this, Borgo said his biggest tip for first-time buyers is determining a concrete budget for themselves, as what they're pre-approved for might be more than they're willing to spend.

"The first thing I tell people is to determine how much you're willing to spend monthly, and that's in addition to all of your additional living expenses like groceries, utilities, WIFI, gym memberships — however much you can spend in a month," he said.

He said the next step would be determining how much money you have saved that you're able to pay out of pocket. While many first-time buyers think about putting money aside for a down payment — which Borgo said is actually normally in the 3% to 5% range, rather than 20% — they may forget about things like closing costs, which can be anywhere from 2% to 3% of the home's purchase price.

"So establishing that out of pocket budget, I would say, is vitally important," he said. "Then once you contact the lend to get pre-approved, at that point you're going to start looking for a real estate agent to start looking for homes."

What mortgage programs and resources are available for first-time buyers?

The types of programs and resources available to first-time buyers will vary from lender to lender. In New Jersey, there are several different first-time buyer programs and resources available to help fund the purchase.

This includes the NJHMFA Down Payment Assistance Program, which provides up to $15,000 to qualified first-time buyers to use towards their down payment and closing costs. An interest-free, five-year forgivable loan with no monthly payment, the program must be paired with an NJHMFA first mortgage loan. There is also a NJHMFA First Generation Down Payment Assistance Program, which provides up to $7,000 of down payment and closing cost assistance to first-generation homebuyers.

Borgo said that other standard first-time buyer programs are the HomeReady Mortgage program by Fannie Mae and the Home Possible program by Freddie Mac. He said these mortgage programs are specifically available for low- to moderate-income buyers because they require down payments of as little as 3% and have income limits for who can qualify.

"I think sometimes people tend to go real estate agent, then lender," Borgo said. "In order for the real estate agent to give you that full service , they want to at least know that you've spoken to a bank and that you're a legitimate buyer, because otherwise you'd be wasting their time."

Maddie McGay is the real estate reporter for NorthJersey.com and The Record, covering all things worth celebrating about living in North Jersey. Find her on Instagram @maddiemcgay, on X @maddiemcgayy, and sign up for her North Jersey Living newsletter. Do you have a tip, trend or terrific house she should know about? Email her at MMcGay@gannett.com.

This article originally appeared on NorthJersey.com: How to get pre-approved in NJ for mortgage for first-time home