Buying a house is a huge financial investment; therefore, it pays to know beforehand how much a lender is willing to lend you. There are several steps involved in the mortgage approval process and understanding how the process works will help you determine if can qualify for a mortgage loan and the type of home you can afford. Although a mortgage lender will not give you final approval until after you make an offer on a house, you will most likely need pre-approval from a lender just to work with a realtor.
Take a look at your credit report. Request a copy of your credit report from each of the three credit bureaus and check them for accuracy (see Resources). Traditional lenders generally require a score of at least 720, although it varies depending on the lender. In most cases, there is little chance that you will be approved for a conventional mortgage loan if your credit score is lower than 650. If you have a credit problem, work on paying any seriously delinquent debts to bring all your accounts current. This can help raise your credit score.
Compare your monthly debt payments to your monthly income. You may not be able to get a loan if your debt ratio is too high. Bankrate points out that a lender will look to see if the total debt payments you make each month exceed 36 percent of your gross household income. If they do exceed it, the lender may consider you a high risk for a mortgage loan. Lenders generally require that mortgage principal, interest, property taxes and homeowner insurance not go over 28 percent of your household gross monthly income. This will usually qualify you for a conventional mortgage loan.
Determine how much you have for a down payment. Although it isn’t necessary to have a down payment in hand to be pre-qualified or pre-approved for a mortgage loan, you will want to have some idea of how much money you can put down when you purchase a home. According to Wells Fargo, the minimum down payment usually required for a conventional home mortgage loan is 5 percent. However, the bigger the down payment you can make, the greater the chance that you will be approved for a loan, and the better terms you'll receive. Unless you are applying for a low down payment program through the Federal Housing Administration or Veterans Affairs, a lender may require a down payment of up to 20 percent.
Use an online mortgage calculator (see Resources) to determine if you will pre-qualify for a loan. Before getting pre-qualified by a lender or mortgage broker, performing a self pre-qualification can help give you an idea of how much you can afford to pay for a house. A mortgage affordability calculator will require you to input information including sources of income, monthly payments on auto loans, personal loans, student loans and revolving credit card accounts, in addition to the loan interest rate and loan term you want. You will need to indicate what percent of the purchase price you can put on a down payment, what percent of your gross income you spend on housing expenses, as well as what percent of your gross income you spend on housing plus all other debts and expenses. This will help you determine if you can afford the mortgage payment for a house within a certain price range.
Talk to two or three different mortgage lenders. Many offer a pre-qualification analysis over the telephone or online by using the information you provide. Be prepared to give basics such as income, debts and the down payment you expect to make. A lender may be interested in whether you have worked at the same job or within the same field or industry for the last several years. Having a consistent income, assets and additional sources of income will help qualify you for a mortgage loan.
Collect together all relevant financial documentation for both you and your partner if you are going to apply for a mortgage jointly. Dig out your two most recent W-2 forms, last two or three pay stubs and tax returns from the previous two years. Assemble several months’ worth of bank statements and any information relating to investments and other financial assets. A lender will evaluate this information to determine if you qualify for a mortgage loan.
Apply for pre-approval from more than one lender. Pre-approval assures sellers that you can actually obtain a mortgage for a home. Securing pre-approval also lets you know exactly how much you can borrow. It is at this point that a lender will review and verify your credit history. Pre-approval letters are generally valid for a period of 90 days.
- A pre-qualification for a mortgage by a lender is based upon credit, employment, income, debt, and asset information provided by the potential borrower. With a pre-approval, however, the same information is requested, but unlike a pre-qualification, the information is verified.
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