Buying a Home series 1 – Getting Pre-Approved
One of the biggest hurdles in buying a home is getting the loan. Our country is still rebounding from the housing crash. Lenders have become much more conservative as a result to prevent against future situations.
It is important to understand that there is a big difference between being Pre-Qualified vs Pre-Approved.
Pre-Qualified means a lender has listened to you verbally give your information and used that information to electronically determine if you are likely to be approved.
Pre-Approved means you have provided your actual financial documents to your lender, an underwriter has reviewed it and determined that “you” are pre-approved for the loan.
Before you contact a lender, put yourself under a microscope and focus on these three areas to put yourself in the best possible position to be approved for the best possible loan.
When applying for a loan, the lender wants to be confident in your ability to pay back the loan. Typically lenders want to see that you have at least a two year history with your current employer or that you have two or more years in your current profession. This provides a more reliable income pattern. Different loans and programs have different income requirements. An example would be a first time home buyer. Often down payment assistance programs are available to help many first time buyers who do not have a ton of money to put toward the initial purchase. These programs focus on your income and need for the assistance. Overall, the higher your income is the higher loan amount you would be eligible for which translates into having more options about the size, area and condition of the home you purchase.
POINT – Income determines if you will be eligible for a loan and initially for how much you can borrow.
All lenders review credit reports to determine your character before lending you money. A credit report is the equivalent to an adult report card which shows how you have managed money in the past and provides a grade “credit score”. Scores can range from 300 to 850. In general, lenders want to see scores at or above 640. There are some loan types that are more flexible with scores for eligibility. The higher your score is, the more loan options you will have and you receive better pricing as well. Pull your reports and scores and review them. If you need help understanding your reports and scores or you have areas that you need to improve before buying, Apprisen has services to help. Just call us or visit us on-line for more information.
POINT – Credit will determine the total fees you have to pay for borrowing the money. Annual Percentage Rate (APR) The higher your score, the lower your cost will be.
- Debt to income ratio (DTI)
This takes into account your current debt payments and how much of your income is spent on them. This is important because getting a mortgage loan will add another monthly payment, typically your largest payment each month. Lenders want to see that you will be able to afford to repay your mortgage loan while also paying back any other debt you have. Lenders use your gross income and debts to determine your DTI. Your gross income is the amount of money you earn before any deductions are taken out such as taxes, etc. There are different loan types and each type has its own ratio requirements. I will use a Federal Housing Administration (FHA) loan as an example. FHA says to be eligible; your house payment (PITI) cannot exceed 31% of your monthly gross income. Then add to that any auto loan payments, credit card payments, student loans payments, etc. Your total combined debt payments cannot be more than 43% of your monthly gross income. These are generous ratios compared to some other loan types. In short, try to pay off or down any debts you have to eliminate or lower monthly payments. That will help improve your DTI.
POINT – Your DTI will determine how much you can afford to repay with current debts. This will determine the final total loan amount you would be approved for.
Here is a good resource to help you understand the most common loan types.
Now that you know you are in the best position to apply for a loan, here are the four steps to your Pre-Approval.
You are ready to start thinking about how much house you can afford. Your lender will use your gross income to determine your maximum mortgage payment. However, I encourage you use your net income. Use our calculator to help you determine your maximum loan amount based on the highest payment you can afford.
For example: If your highest affordable payment is $ 1,000.00, 30 year term, 3% down payment, with an interest rate of 4.75% then your highest loan amount would be about $ 163,000.00. This gives you a good idea as to the price range of houses you want to stick to.
Contact as many lenders as you would like, but do not let them pull your credit reports yet. You will want to speak with the lender who is the most experienced with first time homebuyers and/or all loan types. Tell them things they need to know including your credit score and your debt information. They will be able to tell you an estimated loan that fits your situation and what the estimated term, fees or interest rate would be including closing costs and pre-paid fees. Once you have narrowed it down to the lenders you are seriously considering, apply for the loan with all of them within the same week. This minimizes the negative impact to your credit score. The lender will let you know if you have been Pre-Qualified.
Tip: If down payment assistance is available for you, the lender will be aware of the programs and will be able to help you apply for it. So ask the lender while you are comparison shopping. This will save you time doing your own research. You’re welcome!
Make a final decision for which lender you will use. Next, you will complete and sign an actual loan application and provide the lender with your financial documents. You can expect to provide paystubs or proof of your income, bank statements, and tax returns, etc.. Basically anything that will verify your income and assets. Your application and supporting documents will then be reviewed by an underwriter who will decide if you are in fact Pre-Approved and for how much.
Make sure you stay connected to the Money Minute. In June I will continue the Buying a home series 2 – Finding your home after you’re Pre-Approved