Mortgage Qualification

What can you afford to pay for a house?

First, start by making a budget if you don’t already have one. Be honest with yourself about the amount you can reasonably spend each month on your housing. Be sure to factor in taxes, insurance premiums, maintenance and other upkeep required when you own a home. You should also consider your other financial obligations and how they play into your ability to pay for a mortgage.

With excellent credit, you may find that you qualify for a substantial loan, but you need to remain realistic with yourself about your current financial situation – don’t count on a pay raise that may not come through, and don’t tell yourself that you can scrimp each month in order to make your mortgage payments.

Checking your credit history is key

Your FICO score, also known as your credit score, tells lenders whether you are a worthy risk. The number is an indicator of whether you pay bills on time and whether you have outstanding debt. Check your credit report through www.annualcreditreport.com to request your FICO score, and then get to work disputing any incorrect information with your existing or previous lenders.

If your score is low, your home loan application may be rejected. Even if it’s accepted, you may be required to make a larger down payment or pay a higher interest rate on the loan.

The difference between pre-approval and pre-qualification

Pre-qualification is the first step in the mortgage purchase. Before showing you properties, we will ask you for a pre-qualification letter. The process to obtain one is straightforward: Over the phone or online, you supply your lender with information about your financial situation, including your income, assets and debt. The lender will evaluate this info and provide a ballpark figure of the mortgage amount for which you could qualify, in addition to discussing your mortgage options. This service is usually free.

Your pre-qualification doesn’t guarantee how much the bank will lend you. It also doesn’t include analysis of your credit report or deep scrutiny of your ability to pay for a home.

Pre-approval, on the other hand, is much more involved. After completing a mortgage application (which generally includes an accompanying fee), you will give the lender the go-ahead to perform extensive research into your financial history and credit score. The lender will then tell you the precise amount that it is willing to loan to you, so you will be able to begin looking for homes at or below that price. Again, you should also take into account your budget as you choose a home. A pre-approval doesn’t guarantee that you can make the corresponding mortgage payments, so you should do the math beforehand.

Completing both steps shows sellers that you are a serious buyer. When you make an offer, you will more quickly be able to obtain a mortgage, thereby reducing your chances of potentially losing out to another buyer.

After you have found the home you wish to purchase, you will update your pre-approval with the relevant details, and your application will be complete.

The last step: loan commitments

Once the lender has approved you and the house you’d like to purchase, your income and credit rating will be checked once more to make sure that it hasn’t changed since the pre-approval. A loan commitment is issued when the bank is certain it will lend.

Taking a hard look at your financial situation will go a long way toward helping you choose the home that is right for you. With a firm understanding of what you can afford and pre-approval from your lender, you will be well on your way to choosing the perfect home for you and your family.

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