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The Right Mortgage Pre-Approval Process
After you use the loan prequalification calculator and understand your situation, there are a couple of things to be aware of if you need to have a mortgage quickly:
1. Calculate Your Monthly Income & Debt Obligations
The lender requires for you to know your monthly income, and how much of it you’re going to use to pay off debts.
Gather your financial documents to prepare for calculations. Your lender requires two-weeks of pay stubs; it’s important to have these documents with you. It’s even more complex if you work for yourself, or have a variable income. In addition to, the lender may want to see your tax returns for the past two years. They may also apply the average of those two years to the calculation. Lenders also might use the lower tax return as the foundation for loan pre-approval.
Make sure you stay in a certain ratio as the lender computes the numbers in your loan amount. If you have any debt, the lender has the right to decrease the amount of your loan. If you have additional debts such as an auto or student loan, the total debt amount will have an impact on the new loan. To prevent this, pay off some of your old debts (if not all) first and avoid accruing new debts too.
2. Understand Your Overall Credit Profile
It’s best to retrieve your credit report and history before applying for a new loan.
Furthermore, check your latest credit report for any discrepancies such as debt that’s truly paid. Use a credit monitoring service while you are looking to buy a house. It costs around $20 per month to get an updated credit report. After you make a close on a property, you can discontinue the credit monitoring service.
Your FICO score should be no lower than 680. If your credit score is 700 or above, you are highly favorable to qualify for a loan. It’s difficult to qualify for a loan if your score is anything less; you need a co-signer if this is the case.
Some lenders may request you to improve your credit score before they grant you a loan. Keep in mind that having a low credit score means that you will have a higher interest rate too.
Your credit score should be no less than 680. Getting an FHA loan is a better option for you if this is the case. Borrowers with low credit scores are more likely to qualify for this type of loan too. Moreover, additional fees may apply to this type of loan.
If at all possible, don’t open a new line of credit a few months before applying for a mortgage loan. It doesn’t look good to bankers if they see you adding new lines of credit. Even applying for something minor such as a phone subscription, can pose red alert for lenders. They may even require an explanation in a form of a letter
3. Set Your Mortgage Budget
You need to verify two pieces of information before talking to a loan mortgage officer. The first one is what loan amount you can afford. The second is how much you are able to pay overtime.
Furthermore, a good thing to do is to see how much of your income you are willing to apply towards your housing payment. A good rule of thumb is to not go over 30% (pre-tax) of your total gross income. It’s also important to include all fees, taxes, and insurance too.
If your total annual income is $84,000, 35% of that is $28,560. In a 12 month period, you will pay $2,380 per month. This amount is known as a high limit. Another option is to lower it to 25% of your gross income. In addition to, some advisers can even give you a conservative percentage.
This is just merely a guide because it’s challenging to determine your monthly payment to a fixed home price. Your monthly expenses will contain things such as interest rate, house insurance, property taxes, house insurance, etc. Even though you can’t compute an accurate amount, the agent will give you a more accurate number.
4. Compute Your Down Payment
Next, you need to compute the amount you want to pay as a down payment for your new house. The average amount most lenders recommend is around 10-20 percent of the cost of the house. Moreover, for FHA loans and other special programs, the down payment amount is significantly cheaper.
From my own advice, it's good if you can put 20% down on a house if you can afford it. As a result, you will not have to obtain a PMI (private mortgage insurance). This is only a security measure that is made by the lender if you decide to terminate your loan before having the right amount of equity. It’s basically insurance for them out of your own expense, and you should avoid it at all costs.
It’s vital to have clarity on your budget and desired loan amount before go through the approval process.
There’s always the temptation to have an even bigger house that could be out of the budget. Money-hungry lenders will try to convince you that the value will appreciate later. Receiving new information can alter your original plans if you allow it.
Furthermore, it’s very important that you buy a house you can afford, and live comfortably while paying off the loan. It’s traumatizing to buy a new house you can’t afford and the bank takes it away from you. Always consider all pros and cons before signing the dotted line.
Your Lender Pre-Approval Checklist
As you already know, the process for pre-approval is highly important. The process will solidify your involvement.
Initially, you have to fill out the application in its entirety and pay an application fee too. Once the application is complete, you have to provide additional documents to the lender so they can perform a background check. They will thoroughly check your credit history, financial condition, and current credit rating. This procedure is done before you find a house; also, leave the ‘property’ section blank.
From the comprised data, the lender will give you an estimated mortgage loan amount you qualify for. The lender can also give you an estimate on how much interest you will have to pay. Furthermore, you can negotiate on the amount of interest at this time.
Lenders will always want some form of documentation; it can vary from lender to lender. There is no ‘no documentation’ or ‘no verification’ condition at play. Under normal circumstances, lenders desire to know your assets, annual income, and other payments that can decrease your income.
The pre-approval process takes about two-four weeks. Through technological innovation, the pre-approval process will become faster over time.
You will receive a conditional letter in the mail of the loan amount once the lender approves your application. The letter can also state your interest as well. Furthermore, you will have more clarity if you want to buy a home at that loan amount, or cheaper. Once the letter arrives in the mail, you can make an offer at a faster rate. The financing side of it is over at this point; it will also save you a lot of time.
Once you know the house you want to buy, you can then complete the application form. Don’t forget to fill the missing details about the property you want to buy. Overall, the application process is complete at this point. The lender will release the loan once they finalize the appraisal and see if everything’s fine to move forward with the loan. Afterward, they will apply the loan amount to the property, and you’re all set!
Loan Prequalification Calculator – Definitions
Total amount to be taken for this loan.
Annual interest rate for this loan.
Loan term in years
Number of years for this loan's term.
Annual after-tax income
Your total after-tax income for the current year from all sources of income from all borrowers on this loan.
Number of income sources
Number of income sources from all borrowers. The more income sources you have, the better your ability to qualify for your new loan.
Payments for existing debt
Total existing monthly payments remaining after the funds from this loan have been received. This total does not include the following: Any loan payments on loans paid off with proposed new loan, the new loan payment, any credit card payments.
Credit card limit
Your current total credit card limit. This is the total limit of your credit cards, not your outstanding balance. Include the credit cards from all borrowers on this loan.
Number of dependents
Total number of dependents. This number does not include the borrower.
Real estate that will secure this loan
Total value of the equity you have in real estate that will secure this loan. If you already have a loan secured by the same real estate you are using for this loan, make sure to only enter the equity you have in that real estate.