How To Prequalify For A Mortgage
Hear is how to prequalify for a mortgage in six easy steps. All potential buyers of real estate need to prequalify for a mortgage before even looking at property in today's market. There is literally no point of looking at homes, if you do not qualify. Getting a mortgage is a daunting task and only the buyers who are very well qualified will pass the loan committees today. There are many mortgages available for borrowers with poor credit, but those too have conditions that must apply.
- How to Choose a Lender or Mortgage Broker. The very first step in getting prequalified for a mortgage is choosing a lender or mortgage broker. Not every lender is a perfect fit for every buyer. There are FHA loans, VA loans and Conventional Loans. Each type of loan has a particular lender that fits best. There are many lenders that handle all three types of loans, but it is best to choose a specialty lender. Choose a lender with a solid track record with the loan you desire.
- Which Loan is Correct for Me? Besides the lender, the borrower must choose a type of financing that will fit their needs. Most beginning buyers will choose an FHA insured loan, VA loan or zero down loan. These loans each have their own guidelines and are more lenient with the FICO (Fair Isaacs Corporation) score. This is the score that the credit bureau will attach to your credit rating. VA loans have no PMI (private mortgage insurance) and allow the borrower to have higher LTV (loan to value) ratios. FHA is very lenient with FICO scores and past delinquencies and even a bankruptcy that is over three years old with proper explanations.
- Paperwork Necessary for a Prequalification. There are many things that the lender will need to have in order to begin the prequalification for a mortgage. These items are both necessary and important to get a complete picture of the borrower's ability to handle and qualify for a loan. Here is a list of those things: verification of employment, verification of down payment and closing cost, bank statements and taxes for two years if self-employed
- Credit Reports. The bank will want to run a credit report on each borrower. The bank will do a very thorough credit check on all three bureaus and look for things such as delinquencies, bankruptcies and collection accounts. Once the bank has the credit reports, they will know what the FICO score is and be able to qualify the borrower more.
- Debt Ratio Calculations. After the lender has received the credit report and income verifications, he will be able to look at your LTV (debt to loan) ratios. Many lenders want to see between 28 to 36% debt ratio, but FHA wants to see 30%. VA is more lenient and will go higher than most lenders. The bank will take your income, minus all debts and then take that figure and multiply it times the allowable LTV figure for the loan you are applying for. So if you make $3000 after deductions and debts and you are applying for an FHA insured loan (30%), the lender will allow you to have a mortgage payment including taxes and insurance of $900. Depending on the current interest rate, the lender will give you a figure you qualify for.
- Prequalifications are Free to Borrowers. Lenders and banks want to get more loans and so they will in many cases offer to prequalify the borrowers for free. Many lenders will pay for the credit report also. It is important to realize that the lender in turn will expect the borrower to commit to a loan, but it is not required. Never sign and promise to commit to one lender who does the prequalification. It may be that you will find a better loan or lender before you purchase your home.