The first step in the process of applying for a home loan is to get Prequalified for the same
It is crucial to prequalify for a mortgage before you begin the process of searching for your ideal house. Loan preapproval tells you the price range of a home you can be most comfortable to buy and the amount of money a lender is willing to lend to you. This assists you in narrowing your search to homes within your budget range and understand what is required to secure the mortgage amount that will be required.
What Lenders Consider When Approving Those Seeking Loans
When you seek a home loan, the lenders wish to ensure that you are actively employed and earning regular income. They also want to see that you have a good credit history with low D/E ratio as a sign that you can manage your finances well. Here are the main criteria lenders evaluate:Here are the main criteria lenders evaluate:
Employment and Income – The loans must be repaid out of earnings, so lenders expect the borrowers prove that they have had a steady source of income for the last two years. Independent borrowers can be asked to submit extra documents like tax returns. The purpose is to ensure that the applicant has a consistent income source through which he or she will be in a position to afford the mortgage. Larger incomes allow for larger loans and costlier houses. Other incentives such as bonus, overtime, commission and other forms of variable remunerations may also be included. However, the lender has to be sure that the income will be constant in the future and sustain the repayment process.
Creditworthiness – Credit scores and credit history: Most of the lenders will want to get a credit check showing a credit score of not less than 620 or 640. The higher the scores, the better mortgage rates and terms one can get in the market for a mortgage. This means that a good credit status demonstrates to the lenders that one is responsible with credit and thus can pay for the monthly mortgage as agreed. Negative credit records such as late payments, collections and others will decrease the scores. It will be beneficial to enhance the scores before applying for home loans in case the scores are low.
Downpayment Amount – This is the portion of the price you are willing to pay upfront, and thus reduces the size of the mortgage loan required. Twenty percent down payment has been the most common ratio in the past. This means that the better rates and terms will go to those customers who are willing to put a larger downpayment on the car. However, most lending programs today allow zero to five percent down payment. VA and USDA loans do not have any minimum credit score requirements. The amount which you pay initially determines the amount that you need to borrow after that.
Debt to Income Ratio – Your “back end” DTI and front end debt to income ratio calculation is a function of your income, debt and down payment. Back end DTI calculates total monthly obligations inclusive of the new mortgage payment against gross monthly income. Some lenders do not allow back end DTI to exceed 43 percent. Front end DTI only considers the mortgage payment and other housing expenses as a proportion of income. Front end ratios as high as 28% are often tolerable. DTIs less than 36% allow for a larger mortgage loan. When applying for a mortgage, it is essential to pay off debts to lower the DTI to qualify.
Home You Want to Purchase – The price, type, location, and condition of the home you are planning to purchase also influences the mortgage loan amount and the terms that are available to you. Some examples of how more expensive homes demand more are bigger downpayments and the mortgage amount required. Other restrictions may also exist in unique properties. An experienced loan officer can educate you on how the attributes of your target home influence your eligibility.
Documentation to Bring When Seeking Prequalification
Gathering documentation ahead of getting prequalified can ensure the process goes faster and smoother:Gathering documentation ahead of getting prequalified can ensure the process goes faster and smoother:
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Pay Stubs - Your lender will most likely request copies of your latest pay stubs confirming your income. If self-employed, recent tax returns must have been submitted to the licensing authority.
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W2 tax documents – Ensure that you have the W2 tax documents of the previous two years to support your steady employment status. Always be prepared to provide some reasons for any employment gaps or changes in employment.
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Bank Statements – One to two months of checking, savings, and any asset account statements to prove you have the funds for the downpayment and other closing costs.
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Credit Reports – Credit reports and scores are usually sought by most lenders on your behalf. However self ordering gives them free reports first so that one can know what they will be expecting them to see and whether corrections are needed before they do so.
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Debt Information-Other current monthly debts, including the minimum payments and the balances, should also be included to determine the effect on the overall debt ratios.
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Property Details – If you have already chosen the house you wish to purchase, give those details – the price, location, whether it is a condo or not, and so on since they influence the financing options.
Though getting a home loan approval needs you to meet the above mentioned eligibility criteria it is always possible to have a much better file which can help to get a better terms and interest rate on your home loan. Having lower debts that you want to clear before applying, having a higher credit score in case it is low, or having more money to put down as down payment can enhance the application. A mortgage broker is also another good source to help one get perspective on where they stand with their credit and how changing things may affect the rates and other financing available to them.
It assists in determining what mortgage amount and its terms the borrower may get according to stated income, credit records, debts and the down payment. Gaining preapproval before home shopping is beneficial since it establishes realistic expectations for home affordability and loan approval – plus signals to sellers that you are a serious buyer when they receive an offer on a newly built home. When going through the procedure of prequalification, it is essential to learn more about qualification procedures and steps taken to increase the likelihood of being granted improved financing terms before going through the full qualification process once the offer on a property has been made.
