How to Prequalify for a House Loan

Preapproval can be the first step toward home ownership.

Prequalifying for a home mortgage means receiving a lender's letter with a written estimate of the amount of a loan for which you could qualify. To obtain a prequalification letter, you need to communicate with a lender about your debt, income and assets. This information enables the lender to establish your debt-to-income ratio, which determines the amount you can borrow. Most lenders prefer a 36 percent debt-to-income ratio with the mortgage representing 28 percent. The prequalification process also gives you an opportunity to discuss your goals for home ownership. This could include your concerns as a first-time buyer or as someone trading up to a larger home or downsizing. Prequalification can be done on the phone, in the lender's office on online, in some cases. The service is usually free or at a nominal charge.

Things You'll Need

• Total annual income
• Total monthly debt payments
• Loan balances
• Total cash and asset values
• Credit check, optional
• Notes on credit or debt problems
• Financial statements
• Past tax returns, W-2s, paystubs

Instructions

Take stock of your income, debts and assets

1. 

   Total up income, debts, assets.

   Estimate your annual income from all sources. Look at your tax returns, W-2s, current paystubs, 1099 freelance income and more. Estimate your annual income, both presently and for the previous two years. Include in your total any recurring payments you may receive such as alimony, rental property income or other investment income. Be sure to get the input of any co-borrower, such as a spouse or partner who will share in the responsibility for the loan.

2. Total your debts. Make notes of the monthly payments you make on all loans and obligations such as car loans, lines of credit, alimony and personal loans. You will also need to list the balance owed for each obligation. You should make a note of anything worrisome in your credit history.

3. Total your assets. The lender will need to estimate funds you will have available for a down payment and closing costs. Check your statements for your savings and investment balances plus any other assets you intend to contribute toward a down payment. Add these items to your worksheet. You will also want to list the value of other assets you own so your lender can get an idea of your total assets and net worth.

Prequalify with lenders

1. 

   Make a list of lenders.

   Develop a list of lenders. Your real estate agent can refer you to local and regional loan sources. Ask friends and business associates for referrals to banks, credit unions and other mortgage lenders. If you own a home, your current lender may be eager to keep your business.

2. 

   Call or visit at least two lenders.

   Call at least two banks or mortgage companies. Speak to at least two lenders to get a better education on your loan worthiness and your best loan options. Use your worksheet notes to discuss your income, debt and assets. If you have had credit or other debt problems in the past, be frank with the lender. It is better to know where you stand now, so you can focus on what is affordable and not worry about what might happen when you make an offer on a home. If the matter turns out to be a minor concern, that is also good to know. Lender representatives are also knowledgeable about steps you can take now to improve your credit or debt situation and boost your borrowing power.

3. 

   Learn about loans until you find a fit.

   Get Information about different loan types. Be sure to ask about the different types of loans you may qualify for and any advantages or limitations that apply to your situation. For example, if you are a veteran, you may be entitled to certain advantages. FHA loans can be had for lower down payments, but not all sellers will accept them. The representative can explain the limitations and advantages of FHA vs. conventional financing and which is better for your situation. Discuss adjustable and fixed rate mortgages and other options the lender offers.

4. Obtain prequalification letters. Get a prequalification letter from one or both of the lender organizations. You can choose the one you prefer in a given situation if different amounts or terms are discussed. The letters will also state that the lending firms do not guarantee you will receive a loan.

The preapproval process

1. Get preapproved. Unlike prequalification, preapproval is a written commitment from a lender that you can get a specific loan. The lender is stating that, barring changes in your information, you will receive a loan based on your financial merit which the institution has verified. A credit check is routinely done. If you are comfortable with one of the lenders you have talked to and also comfortable that you can locate a desirable and affordable home, this is a good step to take.

2. 

   Paying for an application now can pay off later.

   Pay the mortgage application fees now to avoid problems later. WIth preapproval, you will usually complete a mortgage application and pay an application fee. For a preapproval letter, the lender will look at your total worthiness, including your credit score and any judgments from any legal action and past problems. SInce your credit rating has a direct effect on whether a loan can be made and under what circumstances, this is vital information. Better credit will secure a lower interest rate and keep your payments lower or enable you to afford a more expensive home. When you do find a home, most of the work in financing the loan has already been done.

3. Ask about time frames and rate locks. Your preapproval letter is probably good for a specific number of days, so be sure to note the expiration time. Locking in loan interest rates for a fee is also a feature of preapproval that some lenders offer. Locking in a low loan rate can be a good idea if mortgage interest rates are rising. The longer the guaranteed lock period, the higher the fee.

4. 

   Preapproved means more to sellers.

   Be offer-ready with your preapproval letter in hand. Most home sellers are far more likely to accept an offer from a buyer with a preapproval. Homes "priced to sell" will go quickly, even in a slow market. With a preapproval, you know you will be able to get a loan from the lender who has written the preapproval and you know the terms, including price, down payment and type of loan, The seller also knows it, and your offer will inspire more confidence than the same offer based solely on a prequalification.

Tips & Warnings

• Prequalification is fine as a start to the loan and home buying process.

• Preapproval is likely to count more with home sellers.

• Prequalifications often miss important debt issues.

• Prequalification is no guarantee of a loan.

References

• RealtorMag: Avoiding application problems
• FHA.com: Prequalify for an FHA loan
• Lendingtree.com: Getting pre-qualified for a mortgage loan
• Loan.com: Comparing Mortgage Loan Prequalification and Preapproval

Resources

• FHA.com: FHA loan requirements
• Bank of America: Prequalify now