How to Qualify for a Mortgage & Prequalifying for a Mortgage
How to Qualify for a Mortgage and Prequalifying for a Mortgage
Obtaining prequalification is the initial step in buying a home. This helps you make an informed decision about the price range and location of properties you may be interested in, as well as preparing you for the mortgage application process.
Depending on the lender, prequalification can be done over the phone, in person or online. Usually taking around 15 minutes, they will provide you with a credit score estimate as well as an amount they believe you qualify for.
Your credit score is an important factor in determining your affordability, and lenders often use it to calculate your debt-to-income ratio. This ratio is the total of all monthly housing expenses (including your mortgage payment and property taxes) divided by total gross income. Typically, lenders recommend that your DTI not exceed 36%; however, government-backed mortgage programs may allow a higher percentage.
When calculating your debt-to-income ratio (DTI), lenders take into account both your existing debt load and projected home expenses to determine if you can afford the new mortgage. The higher your DTI, the lower your purchasing power; therefore, it is essential to pay off any existing debt before applying for a mortgage.
To calculate your debt-to-income ratio (DTI), lenders will review your paystubs, W-2s and other documents that demonstrate your income. They also take into account how frequently you have changed jobs and whether your work history has been consistent over time.
Your down payment is another critical factor mortgage lenders take into account when making their decision. For conventional mortgages, the minimum down payment required is 3%; if you plan to put down less than 20%, private mortgage insurance may be necessary.
Depending on your credit score and loan type, you may be eligible for a mortgage with as low as 10% down payment. This option can be particularly appealing to first-time homebuyers since they qualify for more affordable loans without paying private mortgage insurance (PMI).
If you’re uncertain of your affordability for a new house, NerdWallet offers an online mortgage affordability calculator to help. This tool takes into account factors like monthly income and debt payments as well as factors like down payment amount and other costs in order to determine your maximum budget for purchasing a property.
Once you know your affordability criteria, you can begin searching for homes within that range that fit within your budget. This will help narrow down your search and make finding a home much simpler.
The mortgage pre-approval process is the next step in the home purchasing process and carries more weight than just qualifying for a loan. After your lender reviews all of your information, they will issue you a conditional commitment in writing for an exact loan amount.
When you’re ready to purchase a home, your mortgage pre-approval can help make an offer that is competitive with others in the market. Plus, having this assurance gives you great reason for optimism that you will be successful at getting your dream home!