Qualifying for a Mortgage

How to Pre-Qualify for a Mortgage

Many buyers prefer to pre-qualify for a mortgage loan before heading out to shop for a home. Pre-qualifying helps pinpoint exactly how much house you can afford.

The loan application process requires a massive amount of financial information. Below, you'll find a list of the various documents you'll need to apply:

• Social Security numbers for borrower and co-borrower.
• Information on residence for past two years and landlord or current mortgage holder's address and local number.
• Proof of employment and income, along with past two pay stubs, W-2 forms from the previous two years and employer's address; for self-employed buyers, copies of tax returns and current balance sheet. Additional proof of earnings may need to be provided.
• Bank account balances and account numbers (for checking and savings accounts), with address of banks and statements from the last three months.
• Statements for stocks, bonds, IRAs, CDs and other financial assets. These are used to prove down payment funds.
• List of any rental property ‹ address, rental agreements, mortgage balances, mortgage holders' addresses, loan numbers.
• List of other valuable assets, such as automobiles, boats, jewelry.
• List of all liabilities (car notes, school loans, credit cards, department store debts), with balances owed, account numbers, creditors' names and addresses.
• List of other monthly expenses, such as alimony or child support payments.

How to Qualify for a Mortgage

Be a homebuyer your lender will love

From zero-down mortgages to rock-bottom interest rates, financial institutions today are aggressively seeking your business ‹ and your signature ‹ on a new home loan. However, while banks and other mortgage lenders gladly offer loans to homebuyers in all kinds of financial situations, they do have distinct preferences and more attractive interest rates for certain types of borrowers. If you're considering buying a new home, it definitely pays to boost your ability to get approved for the best mortgage.

Here are five key "approval priorities" lenders will consider.

1. A history of timely current rent or mortgage payments The most important credit criterion is whether you've made mortgage payments successfully in the past. To a lender, that payment history is a major factor in predicting whether you'll make a new mortgage payment on time. If you are currently renting an apartment, late or missed payments could pose a problem.
2. A solid employment background Traditionally, the rule of thumb is two years on the same job, but lenders know that's not always reasonable. If you can justify frequent job changes with increases in salary, previous "job hopping" may not hurt you. Lenders will also look at whether you've stayed in the same line of work. If you've often jumped from one field to another, a lender may see that as a risk. If you're self-employed, a lender will usually use the same parameters. Also, self-employed borrowers will have to show where their income is derived.
3. Adequate earnings to cover debt To determine whether you can afford a mortgage payment, lenders use two different debt-to-income ratios. For the "front" ratio, the estimated mortgage payment should be no higher than 28 to 30 percent of your gross income. For the "back" ratio, the lender will add all of your "revolving" monthly debts, including credit-card charges and payments on school and/or car loans, plus the mortgage payment. Your "fixed" monthly expenses should be no higher than 36 to 38 percent of your income. Normally, high credit-card debt doesn't hurt too much, as long as your income can adequately cover it. However, if you have several maxed-out credit cards, the lender will look more closely at your income for assurance that you can make a mortgage payment on top of all your other bills.
4. 4. A relatively clean credit report Of course, every lender will scrutinize your credit-bureau report. If you've made late credit-card payments, the lender will ask for explanations. If you don't have a justifiable reason for multiple late payments, you'll likely have more of a problem securing a mortgage with the best rates. Hold off on applying for credit until after the mortgage closes. It affects your score and may cause problems. Avoid large purchases and home remodeling projects until after closing as well.
5. A source of funds for a down payment Any mortgage lender will consider a down payment as a big positive. A sizable down payment lowers the lender's risk, since your "vested interest" will make you less likely to default on the loan. A down payment of at least 20 percent will allow you to avoid private mortgage insurance (PMI) added to your monthly mortgage payment. Plus, if you've got the cash to make a 20-percent down payment but you have a less-than-optimal credit history, the down payment could be considered a positive compensating factor.

   Even if you're worried about whether you can qualify for a loan or not, don't be shy about going to a lender to find out. The pre-qualification process is an excellent way for you to accurately evaluate your current financial status and receive sound advice on improving your situation, if need be.