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Can I qualify for a home loan?

Mortgage applicationThe 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. 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.

Difference between prequalified and preapproved

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 does pre approval for a mortgage 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.

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.

Monthly Debt

Little cartoon of a man carrying a debt signLiabilities 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.

Income Pre-Qualification

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.



Frequently 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 since approval.

► How long does mortgage pre approval take?

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 be guaranteed.

► Does getting pre approval hurt credit?

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.

What is an FHA home loan?

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What is a Conventional Loan?

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What is a USDA home loan?

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VA home loan

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