If you are ready to submit your mortgage application, you are likely wondering which personal financial factors are going to be taken into consideration. In addition to a variety of financial documentation required to substantiate portions of your mortgage application, lenders will review your personal credit report carefully and evaluate your eligibility based on several factors..
Should You Get Pre-Qualified or Pre-Approved?
Getting pre-qualified or pre-approved says a lot about you as a borrower. However, not everyone gets pre-qualified or pre-approved before they go home shopping. As a potential buyer, what does your status say to sellers and lenders?
What sellers think of buyers
When you’re buying a home, having pre-qualified or pre-approved status says a lot to sellers. If you are neither pre-qualified nor pre-approved, you’re probably just starting out in the home shopping process. Sellers are likely to take you less seriously as a buyer, and may decline to consider your offer at all if they have multiple offers on the table. Therefore, if you’re serious about shopping for a home, it benefits you to be either pre-qualified or pre-approved before you begin.
What pre-qualified means
Pre-qualification is the first step of potentially getting approved for a home loan. Pre-qualified individuals have passed a basic screening with lenders and are eligible to proceed on to the next step of the qualification process. Basically, pre-qualification is an invitation to fill out a mortgage application and detailed mortgage paperwork to determine whether or not you’re eligible for a loan. Pre-qualified does not mean that buyers are guaranteed a loan, so don’t assume that you can automatically get a mortgage if you receive a pre-qualification letter in the mail.
What pre-approved means
Pre-approval is the next step for potential homeowners. When you are pre-approved, it means that mortgage lenders have taken a detailed look at your financial situation and are likely willing to offer you a loan up to X dollar amount. Pre-approval still doesn’t mean you’re guaranteed a loan; the property and the terms must meet certain conditions in order for the lender to generate a loan. However, pre-approval means you can get that much money from the lender, if everything lines up, so sellers know you’re serious and ready to buy.
Is Applying for More Than One Mortgage Necessary?
The financial industry tagline is “Shop around.” Every information source everywhere tells you to never take the first loan, savings account or financial instrument you see. You can’t make an informed decision until you’ve evaluated what’s available, and compared what you’re offered with what you could get. Does the same generalization hold true for mortgage applications?
Brokers can save you the hassle of shopping around
First and foremost, a good mortgage officer can save you the trouble of shopping around. A mortgage officer basically works as your liason with one or more lenders to determine what type of mortgage you’re eligible to receive. When you find the right mortgage officer, you know you’re getting the best deal out there, without having to do all the legwork yourself. Go with the wrong mortgage officer, and you’ll only hear what he wants you to hear, and you may not get the best deal.
You can check with lenders without applying for a mortgage
Whether or not you’re using a mortgage officer, you can still shop around without applying for a mortgage. Many lenders publish potential interest rates as an incentive to get buyers to inquire about more. If you know the status of your credit score and your general credit-worthiness as a buyer, you can get a fair idea of what type of interest rate you’d be eligible for. For example, if you’ve got bad credit, you’re not getting the 4.25% interest rate that lenders are advertising.
However, if your credit is golden, you’ve got plenty of cash to put down, your income is high and your debts are low – you might just be the ideal borrower, and may be eligible to get rates close to the lenders’ low published rates. Use these rates as an index to evaluate where the market stands and what you’re likely to qualify for, and if the professional you finally utilize gives you something drastically different, you’ll know to ask why.
Don’t Fudge on Your Mortgage Application
Mortgage applications ask for a lot of detailed information about your current employment, former employment, previous residences and income information. When you’re trying to get a home loan, you may be worried about how you answer a mortgage application, and want to present yourself in the most favorable light possible. Don’t fudge on your mortgage application, though; in addition to being a federal offense, it can result in your application being denied.
Be honest about employment dates
When you’re hunting for a job, you may not want to show gaps in your employment to potential employers. Some people feel the same way about mortgage applications; lenders look at employment information, so people want to present themselves in the best light possible.
Resist the urge to fudge employment dates and information
Lenders can and will call to verify employment information. If you give incorrect information, lenders are going to begin carefully scrutinizing your loan application. Lenders don’t like inconsistencies, as they can expose them to big risks. If they spot one inconsistency, they’ll be looking for more, and may use it as an excuse to deny a marginal application.
Don’t fudge on current and prior income
Stretching the numbers on your income is another big no-no. You may be worried that if you don’t show a high enough income, you won’t be approved for a particular home loan. That’s true. However, if you don’t earn a high enough income to qualify for the home loan, you won’t be doing yourself a favor if you get approved anyway.
Lenders set income guidelines because those are the guidelines within which most people can live comfortably. If you fall outside of those guidelines, you may feel you’re still able to pay for a home loan, but you might have to give up a lot to do it. Don’t fudge income information to get a bigger loan. Either come up with more money down, or select a home that falls within your lender-approved price range. Stretching yourself too thin from the beginning is a strong recipe for disaster.
How Much of A House Can I Qualify For?
One of the most common questions that home buyers ask is “How much can I qualify for?” While any mortgage lender can tell you the maximum loan amount they will most likely approve you for, however, only you can determine what you can afford.
You have to understand one thing, don’t allow anyone to tell you what you can afford. You have to be able to determine that. The reason there was a housing crisis and mortgage meltdown was due to the fact the people were getting into homes they couldn’t afford. So don’t let your friends, family, Real estate agent or lender determine what you can afford.
Before setting out to talking to a Realtor you want to sit down and figure out your finances. Sitting down with a properly trained mortgage officer can help get you on the right track.
Take a sheet of paper and write down all your monthly expenses. This includes:
- Auto payments (be sure to include gas and insurance costs)
- Any other loans such as student loans or bank loans
- Credit card payments
- Groceries
- Utilities (gas, electric, phone, TV & internet). Now understand that your gas and electric will most likely go up if you’re currently renting an apartment.
- Entertainment (meals outside the home, activities that cost money for your kids or yourself)
- Miscellaneous (such as savings or college tuition for kids)
Take out your pay stubs for a month and look at the net income. Add up your monthly expenses from above and subtract it out from your monthly net income. The figure you have left over will be an estimate of what can go towards your new house payment (including your taxes and insurance). Now, this is just an estimate. You still will have other expenses you need to think about, such as budgeting for vacations, home maintenance as well as unexpected emergencies.
If you go over this figure, then you’ll have to cut back on your expenses or you’ll end up living above your means. If you live above your means, you’ll end up charging your credit cards up and you’ll begin drowning in debt. Eventually, something has to give, whether you default on your credit cards or you’ll get behind on your mortgage payments.
Once we have this figure, the lender can help you in determining how much of a home this will buy you.
