Can I get a mortgage?
The first step in buying a home is to get preapproved for a
mortgage. The mortgage lender will analyze your annual income, your
credit history, and credit score. Lenders use a calculation called
debt to income to estimate the ideal mortgage payment.
income is a comparison between your monthly income and monthly
debts. After providing the mortgage lender with your financial
information, the lender will decide which mortgage loan is best
suited for you.
Pre-qualification versus pre-approval
- Is there a difference?
When you meet with a real estate agent, he or she will ask you if you
have been pre-approved or pre-qualified. The reason of course is
that the real estate agent does not want to spend time with an
unqualified home buyer; and needs to know your price range.
Is there a difference between pre-approval and prequalification?
There sure is. When a lender pre-qualifies a prospective home buyer,
he or she will ask basic eligibility questions, like, “how much do
you earn”, “how much do you pay out monthly and how much cash are
you working with”. Pre-qualification is nothing more than a light
discussion of the monthly income, monthly bills and available
assets. A pre-qualification interview expresses the “opinion” of the
loan officer about the likelihood of obtaining a mortgage and the
estimated price range. Pre qualification does not mean pre approval!
What is a pre approval?
Pre-approval involves an in-depth investigation of an applicant’s
finances and includes documenting the home buyer’s income, assets
and a review of the home buyer’s credit report. The mortgage lender
will ask to see the home buyer’s paystubs for the previous 30 days,
bank statements for the previous 2 months, and will order a credit
report from the three largest credit providers. Depending on the type of
employment, the lender may request to see the income tax returns for
the previous two years.
All income that is received may be considered in the pre-approval,
including child support, alimony, pension, retirement distribution,
and social security; provided the income is likely to continue for
several years. All income sources require through documentation.
Liabilities (monthly payments)
Liabilities include credit card payments, auto loans, alimony and
child support payments, and student loans. Obligations with less
than 6 - 10 months (depending on the loan program) are typically
ignored in the qualification analysis.
Bankruptcy, divorce, and child support settlement agreements will
have to be provided to the lender for his or her review.
The pre-approval process is a pretend
mortgage application. A good
pre approval puts you through the wringer before you look for a home
and gives you and the lender time to work through any problems like
an outstanding judgments or collection account(s). It’s not unusual
to have a late payment on your credit report, even if you pay your
bills on time. Creditors and computers do make mistakes and do not
always post the monthly payment as on time. Think of the pre
approval as a financial checkup with all the tests.
Determining the buyer’s monthly income can be more art than science.
Some home buyers are paid monthly, semi-monthly, or weekly and earn
the same amount each pay period, however, arriving at monthly income
when the number or hours changes from pay period to pay period can
be challenging for the loan officer. If you have irregular income or
have multiple employers, you definitely need a complete preapproval.
Mortgage lenders want to see a continuous work history within the
same line or work for 24 months.
Self-employed applicants are thoroughly investigated. The reason is
because the applicant is the employer and has the ability to
manipulate earnings (and losses). Undoubtedly, mortgage lender will
want to see the previous two years income tax returns and possibly a
year to date profit and loss statement from a certified accountant.
Do you have rental income? If so, get your tax returns out. Lenders
will subtract out the expenses for the rental income to determine
whether there is a profit or a loss the rental properties. Rental
losses are subtracted from gross earnings.
Asked Questions About Loan Pre Approval
► Do I qualify for a home loan
Banks and mortgage companies require two years of continuous
employment, although there are some exceptions to the
two year (24 month) rule. Most mortgage lenders desire
a credit score of 620 or greater, however, once again
there are exceptions. For example, the FHA home loan
will accept a 580 credit score. The mortgage programs
require a balance between monthly income and monthly
debt obligations. Lenders use a formula called debt
to income to help determine the ideal loan amount and
monthly mortgage payment. The only way to determine
whether you will qualify for a mortgage is to speak
to a mortgage loan officer to determine whether you
qualify for a home loan.
► How long is a mortgage pre
approval good for?
Most lenders will tell you that their pre approval is
good for 60 days, but the pre approval is dependent
on maintaining the status quo for income, credit, and
employment that was provided to the lender. Taking on
more debt or reducing cash assets can nullify the pre
approval. Don't quit your job or make any changes
to your employment. In short, the pre approval can extend
much further than 60 days provided no changes have occurred
► How long does mortgage pre
Pre approval can take as little as 30 minutes, but could
stretch out weeks if you do not have all your information
ready for the loan officer. The mortgage lender will
want to see your most paystub or ask you to recite the
information on the paystub. He or she may want to see
(or hear) your W-2 earnings from last year. Are you
receiving or paying child support or alimony? The lender
needs all information relating to monthly income and
monthly debt obligations. The self employed, rental,
and non-taxable income can slow down the pre approval.
Prior to speaking to a loan officer for pre approval
or pre qualification, have your tax returns for the
two previous years, your most recent paystub and bank
statements and any other savings account(s). Including,
401K and deferred retirement accounts.
► Does a pre approval letter
guarantee a loan?
When a lender provides you with a pre approval letter,
he or she is basing the pre approval on a hypothetical
sale. The lender is estimating the sales price, real
estate taxes and homeowners insurance based on your
financial information; therefore, no pre approval can
► Does getting pre approval hurt
The credit inquiry will have a nominal impact, if any.
► How do I get pre approved for
a mortgage loan?
Any of the lenders below will be happy to start the
pre approval process.