Your First Step in Your Home Search – Mortgage Prequalification

It is a good idea before beginning the home-buying process to obtain prequalification for a mortgage. You will learn the price range in which you should search for houses. In addition, it lets sellers and real estate agents know you are a serious buyer and not just window shopping. Prequalifying for a mortgage involves giving the lender general information about your financial picture including credit history, debt, income and employment status.

Credit History
A lender measures your willingness to repay your outstanding debt by looking at your credit history. Your credit history shows a record of loans you’ve paid in the past and how well you are paying off your current debt. This information gives lenders an idea of how reliable you will be about paying a mortgage in the future. If your credit history shows you have consistently made timely payments to your creditors, you have a better chance of qualifying for a loan.

Income
Another important step in prequalifying for a loan is your ability to repay the loan. The lender looks at your income to make this determination. Usually the lender will require at least a month’s worth of pay stubs to determine your ability to pay. If you are self-employed, the lender usually requires tax returns from the previous two years. You are more apt to qualify for a loan if you can show your income has been stable for a couple of years. If you are applying for a joint mortgage, both parties have to submit documentation to verify income.

Employment Status
Employment stability is an important factor when seeking prequalification for a mortgage. Lenders like to see a minimum of two years of stable employment. It is preferable to have steady employment with the same employer for at least two years. However, if you’ve switched employers in less than two years, lenders still look favorably on you as long as the new position is in the same career field. Self-employed workers must provide documentation for two years of consistent and steady employment to be prequalified.

Current Debt
The amount of debt you currently have outstanding is an important factor in the prequalification process. Obviously, if you already have too much outstanding debt, you will be hard-pressed to get qualified. Lenders typically don’t like to see more than 36 percent of your pre-tax income going to pay off debt, according to Lendingtree. This amount includes the 28-percent limit of your pre-tax income for the mortgage payment, taxes and insurance. When using a program such as FHA, these percentages aren’t as strict as with conventional financing.

Down Payment
When considering a mortgage, you need to evaluate how much money you can contribute towards your down payment. The amount of down payment contributed directly affects the amount of house for which you can qualify. With conventional financing, a 20-percent down payment positively affects the rate and terms of the mortgage. Standard conventional mortgage guidelines dictate that a down payment of 20 percent or more excludes you from having to pay private mortgage insurance. With home loan programs such as FHA or VA, the down payment requirement is more affordable at less than 5 percent in most cases. Still, it is necessary to determine how you will obtain the down payment, in order to be prequalified. Your lender is a good resource for assistance with avenues available to you for help with the down payment.

We at Craven & Company Realtors look forward to working with you to find your dream home! Contact us by clicking on the Information link here, or call us at 704.788.1122.

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