What Are the Requirements for Mortgage Loan Prequalification?
One of the first steps in the process of obtaining a mortgage is a getting a loan prequalification. Lenders provide this service to help borrowers better understand their financial situations and determine how much they can afford to borrow. It helps to do this prior to shopping for a home, so a buyer can shop within the price range for which he's been prequalified.
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Process
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A prequalification can be done over the phone, in person or online. It's a relatively quick process during which a person will be asked to provide information regarding his finances. This information will be evaluated to determine how much he can afford to pay toward a mortgage each month. This figure will be used to calculate the price of an affordable home. For a prequalification, a borrower isn't required to show check stubs, tax returns or any other proof of financial status.
Income
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Lenders prefer borrowers with stable income. Statistics show that lending to someone who has worked at the same job or in the same industry for many years and shows consistent income is less likely to default on his mortgage than someone with a spotty work history. A borrower will be asked to provide his annual income figure, and that of any co-borrowers, for the past two years. Lenders also consider alternate sources of income such as child support and rental income.
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Assets
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If a borrower has considerable liquid assets, it's more likely that he'll pay his mortgage on time. This can also be a mitigating factor in the mortgage application process. This can help compensate for a lower credit score or minor issue in other areas of the financial picture. A larger down payment can also qualify a borrower for a loan with more favorable terms.
Debt
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Carrying debt reduces the amount that a person can borrow. Many lenders require that monthly mortgage payments not exceed 28 percent of a borrower's gross monthly income, and total debt, including revolving credit payments, not be more than 36 percent of monthly income. These guidelines help ensure that borrowers make their mortgage payments.
Considerations
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A prequalification simply provides guidelines to the borrower regarding his buying power. However, a prequalification is not a preapproval. During a prequalification, a lender generally doesn't run a borrower's credit, see check stubs or examine other financial documents. The lender uses the information that the borrower gives verbally. A borrower can shop for homes, but he won't know for certain whether or not he'll be able to obtain a mortgage until he submits all of his financial information and is preapproved.
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References
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