What Is Qualification?
House hunting can be the most exciting part of buying a new home. However, before the hunting even begins, it is important to know exactly how much you are going to be able to afford. If you plan ahead, you will be able to save a lot of time and money in the long run. You don’t want to find a home and fall in love with it and then find out you cannot afford it and get outbid. This is where you need to get qualified for a mortgage before you start looking for a new home to buy.
In an older way to find out how much you could afford, the banks would typically take your gross annual income and then times it by three. However, this is not always the best way to determine how much you can afford. There are safer and more reliable ways to figure out what your mortgage budget is. It takes into consideration more than just the mortgage payment. You also need to include in your estimation things like taxes, maintenance, other bills and insurance costs. In general, most mortgage lenders don’t like to offer loan amounts where the borrowers exceed over 44 percent of their monthly allowance towards the mortgage.
If you have excellent credit and a good work history, a lender may go over that amount in some cases. To help determine the ability for a borrower to get approved, many lenders use their own mortgage calculators in order to figure out what a borrower may apply for. There are also many calculators that people can use on their own online as well before visiting a lender.
Checking Your Credit History
Another thing lenders will look at when figuring out a borrower’s qualification levels is their credit history. They like to check a potential applicant’s history through the credit bureaus to help make a more informed decision on the loan application. The credit report of a borrower can also help lenders find out the FICO score to aid in their determination for approval. This FICO score is a numerical representation of a summary of a borrower’s data that is compiled throughout their report. This can include information about outstanding debts, payment history and debt-to-income ratios.
Loan Prequalification And Mortgage Loan Preapproval
Once some basic calculations have been done and a complete financial statement has been formatted, the borrower will be able to ask a lender for a letter of prequalification. This letter will state that you are already approved for a certain loan amount based on your income and your credit history. This will also give a borrower a good indication about how much they will be able to get for a mortgage and determine the amount they will need to come up with for a down payment.
In some scenarios, the prequalification letter may not be enough. Being preapproved is more secure because it means that your lender has already completed the credit check and full financial evaluation. The preapproval is now a binding agreement that the lender must honor. The preapproval guarantees the borrower the loan amount that was stated. When looking to purchase a home, this will give you the best chance of getting the winning bid.
What Is Used For Qualification
There are many factors that are taken into consideration for preapproving a mortgage. A lender will typically take into account the borrowers total income and expenses in order to see how much they have left over for a monthly mortgage payment and taxes. They will also take into consideration the amount of debt a borrower has in comparison to their income as well.