Buyers Week: The Mortgage Pre-Approval Process

As featured on Urban Turf

As buyers get the itch to look for a home and start to venture out to open houses, it will behoove them to go through the pre-approval process. Pre-approval essentially consists of a lender going through various aspects of a homebuyer’s background (credit history, income verification, etc.) to determine how much home they can actually afford (and how much of a loan they will be able to get).

Here is a quick Q&A that will help demystify the experience.

What information will a borrower need to submit for a pre-approval?

In general, a pre-approval applicant will need to submit last year’s tax return, a current pay stub, and information about any other sources of income or assets (investments, retirement accounts, for example). In addition to assets, it is probably a good idea to give lenders a sense of all debts and monthly expenses. Lenders also like know where the down payment is coming from.

How important is good credit?

During the pre-approval process, the lender will also do a credit check. A “good” credit score is now considered 740 or higher. Drop into the high-600s and you may not get quite as low an interest rate as you may have wanted. Once you get below the mid-600s, it becomes more difficult to get a loan.

So, how much of a loan can I expect to get?

Generally, the rule-of-thumb that lenders use these days is to assume that the mortgage payment will be 33 percent of a borrower’s gross monthly income, depending on other debts that the buyer carries. Typically, lenders don’t want the total debt-to-income ratio to be more than 45 percent. (Interestingly, the old standard was 28 percent for housing, and 36 percent for total debts.)

For example, consider a $400,000 condo. Assuming a buyer will put down 20 percent ($80,000), and expects to pay $250 per month in taxes and $300 in condo fees, they will need an annual income of $73,000 to comfortably make their payments. However, they won’t qualify for the same loan if they also have a $600 monthly car payment and $300 monthly student loan payment.

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