How to increase pre approval amount
The
first step in buying a home is to get pre approved 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. Debt to 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 and provide you
with an estimate of the maximum sales price you qualify for.
What does loan pre approval mean?
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.
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.
TIP
Who approves your mortgage? Did you know that a computer makes the decision?
Lenders use a software program called "automated underwriting" and it
can be used for pre-approval.
Read more
What is considered monthly debt when applying for a mortgage?
Monthly
debt includes:
- credit card payments,
- auto loans,
- alimony and child support payments,
- student loans,
- obligations with less than 6 - 10 months (depending on the loan program) are typically ignored in the debt to income analysis.
- bankruptcy, divorce, and child support settlement agreements will have to be provided to the lender (if applicable).
Income requirements for a mortgage
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.
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 thorough documentation.
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.
Frequently
Asked Questions About Pre approval
Q. Are pre approvals guaranteed?
A. I doubt that you will find a lender who will "guarantee" a loan based
on a pre approval application, because the pre approval is based on
estimated real estate taxes and homeowner's insurance cost. And the
interest rate could be higher when you find a house. Another concern
is the possibility that your income could decrease or your monthly debt
could increase. For all these reasons, lenders do not guarantee mortgage
pre approvals.
Q. Can I raise my credit score quickly?
A. Maybe. Some lenders utilize the rapid rescore program in conjunction
with credit simulators to raise the applicant's credit score.
Read more about rapid rescore
Q. Can the pre approval amount change?
A. The pre approval loan amount can increase or decrease due to the
interest rate fluctuations. If the interest rate increase, the amount
you can borrow will decrease. Changes to income and monthly debt obligations
will also affect the loan amount.
Q. Do I qualify for a home loan?
A.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.
Q. Does getting pre approved hurt credit?
A.The credit inquiry will have a nominal impact, if any.
Q. Does a pre approval letter guarantee a loan?
A. 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 be guaranteed.
Q. How long is a mortgage pre approval good for?
A. 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 since approval.
Q. How long does mortgage pre approval take?
A. 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.
Q. Is there a cost of pre approval for a mortgage?
A. Lenders do not charge for mortgage pre approval. They're hoping that
you will finalize a mortgage application with them after you find a
house.
Q. Is there a difference between preapproval and prequalification for
a home loan?
A. 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.
Q. Is there a difference between pre approval and pre qualification?
A. 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!