Searching Zillow you found some amazing homes that you can picture yourself living in. You’ve even reached out to a real-estate agent to show you some of these homes. Now you want to make an offer, but the seller and your agent tell you that you need to get prequalified with a mortgage lender. It’s important to be prepared before meeting with a licensed loan officer so that the transaction goes smoothly and quickly. These are the items you will need for prequalification:
- Social Security Number
- pay stubs
- bank statements
Now let’s take a look at the steps in the prequalification process, its more than you think:
When you first meet with a loan officer, they will have you fill out a loan application. The loan app will ask for items like Name, Social Security Number, Income, Property Address, Value, and Loan Amount. The most important factors will be your social security number and income. Your social will be used to pull a credit report, and income to verify that you can afford a mortgage.
One detail that many people overlook when applying for a mortgage is that they need at least 2 years of work history. Without at least two years of work experience, underwriters won’t feel confident approving a loan since they can’t foresee the future or guarantee that a person will remain employed after getting a mortgage. Therefore, you will need to provide your loan officer with your 2 most recent W2’s along with 2 months of most recent paystubs, and 2 months of recent bank statements. Your loan officer will use this information as part of their DTI (Debt-to-Income) calculation. Remember, the reason for this is to ensure that you will be able to pay a mortgage each month without the risk of foreclosure.
Here is a sore spot for some people, the credit report. The reason most people don’t like their credit to be pulled is because each time credit is pulled for a new credit card or for a loan your score will start to drop. However, it is important to understand the difference between a hard pull and a soft pull of credit inquiries. A hard pull will can bring your score down, but a soft pull will not affect your score. Rest assured that during the prequalification stage of the loan process, a loan officer will only conduct a soft pull of the credit. A hard pull will occur only after you decide to continue the loan process with that lender. This is one of the reasons why you shouldn’t open any new accounts before or during the loan processes as it will negatively impact your credit.
To qualify for a mortgage, a person needs a minimum score of 580. Also, the credit report will be used as part of a loan officers DTI (Debt-to-income) calculations. During a DTI calculation, a loan officer will add up all the payments and minimum payments showing up on a credit report and divide them by a person’s gross income (this will include your new monthly mortgage but excludes medical debt and student loans). FHA loans have a maximum DTI of 43% for most borrowers and up to 50% for borrowers with great credit. Here is an example of a DTI calculation:
Martha has an auto loan for $400 and $200 worth of credit card minimum payments (BestBuy, Amex, chase credit, Kohls credit), and her gross income is $4,500. Her new mortgage will be $1,300. Let’s see what her DTI is:
(Debt)/Income = DTI Ratio
($400 + $200 + $1,300)/$4,500 = 42%
Martha will have no issues obtaining a mortgage because she is below the allowable DTI limits. It is good practice to calculate your own DTI while looking for a home just to know where you stand
A real-estate agent and loan officer may ask a person how they intend to pay for their down payment and closing costs. There are 4 options such as: personal funds, a gift, a government grant, or seller contributions. A gift would be from family or a close friend willing to cover the cost of down payment, and as it is a gift there should be no obligation to pay it back; a gift will need to be accompanied by a gift letter signed by the donor and a copy of their bank statement. A government grant is a great option for those who qualify such as police officers, and other government employees. If they agree, you may be able to get the seller to contribute up to 6% of the sale price to down payment or closing costs.
So long as your DTI is within your loan program limits and your credit is above 580, a loan officer will issue you with a prequalification letter. The letter will contain your name, the property address, credit score, DTI, and estimated loan amount; this will include a break down of principal and interest. A prequalification letter will serve as proof to a seller that you will have the funds necessary to buy their home and make an offer. Without this letter, you won’t be able to make an offer on that lovely home on Zillow.
Best of luck finding your perfect home!