Pre approval estimate for home loan

Get pre approved for a home loan

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.

Difference between preapproval and prequalification for a home loan

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 pre qualification? 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 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.

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

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.

Monthly Debt

Monthly debt includes 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 debt to income analysis.

Bankruptcy, divorce, and child support settlement agreements will have to be provided to the lender.

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.

Mortgage pre approval income

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