Whether buying or selling a home, the real estate transaction process can be seriously stressful. Hey, no pain, no gain. Getting pre-approved for a mortgage can seriously reduce stress levels.
What does Prequalifying for a Home Loan Exactly Means?
An initial step in your journey of buying your dream home is prequalifying for a home loan.
Prequalification for the home loan is a process of estimating how much you can borrow from a specific lender based on your personal information including, your credit rating, debt-to-income ratio, among other things.
Things You Need to Know Before You Prequalify
You will probably go to a loan officer to get prequalification for a home loan. Don’t go into the conversation blank-headed as it can get some people frustrated. Don’t get too focused on the “conversation” with today’s technology, a lot of this can be done online.
But before you try to pre-qualify for a mortgage or home loan, there are some things you should know about the process.
Income Information
Before prequalifying for a loan you should get a good understanding of your monthly, and yearly earnings. This information is an important step in the process. While you may know a rough number, having your tax information or paycheck stubs on hand would help.
Information On Your Expenses (Debt)
You need a good estimate of your bills and debts. A quick review of your bills, loans, credit cards or any other expenses is important to make beforehand. You need to have this information because this is how the loan officer decides if you do or do not qualify for the loan.
Debt-To-Income Ratio
With your income and debt information, you now can figure out your debt-to-income ratio.
According to the “Consumer Financial Protection Bureau”:
“Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. This number is one way that lenders measure your ability to manage the monthly payments to repay the money you plan to borrow.”
To calculate your debt-to-income ratio, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out. For example, if you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2,000. ($1500 + $100 + $400 = $2,000.) If your gross monthly income is $6,000, then your debt-to-income ratio is 33 percent. ($2,000 is 33% of $6,000.)
Your Down Payment
While you may be able to find a “No Money Down Mortgage”, it is always recommended that, if possible, you save up and use the down payment to assist and not only lower your monthly payment but potentially the interest as well.
Thing You Don’t Need – Documents
A privilege of prequalifying is that you don’t need to submit any documents. It’s just a rough estimate to see how much you can borrow. So you do not “need” them for this process, but if you are going to pre-qualify without them, be sure that you use the time to not only look for your dream home but also, look for the documents you will need.
Many people make the mistake of going house hunting without knowing exactly how much money they can get. When you find your dream home but are denied because it doesn’t meet lending standards for a mortgage loan and then have no idea what to do next-the frustration might drive someone over their limit or into an understandable state where giving up seems like a good option.
But by getting preapproved or prequalifying for a mortgage you eliminate more possibilities for road bumps as you go through this journey to find, buy, and move into your dream home.
