Obtaining preapproval rather than simply being prequalified is important when looking for a house. A preapproval will be accepted by sellers more frequently than a prequalification. A preapproval is when the loan is credit approved before a property is found. The mortgage lender actually looks at the loan and gives a conditional approval based on an assumed purchase price, loan amount and property type. A number of the very same factors that affect regular mortgage approvals affect preapproval mortgages.
Credit
Your credit history and credit rating change what loan programs, interest rates and down payment amount may be required in your loan. Usually minor credit problems will not cause a loan to be refused, but they can decrease your credit score and also make your interest rate to rise. The amount of the minimum obligations will affect how much house you can buy.
Employment and Income
Income history and your employment type helps determine how much house you can afford. The preferred debtor works for a company and receives a regular salary or steady hourly pay. Lenders also offer loans to borrowers that are self-employed, or receive other kinds of nonemployment income such as retirement, social security, alimony and child support. Lenders examine these kinds of income ensuring there’s a sufficient history of stable income and a likelihood of continuance for 3 years after the loan closes.
Debt-to-Income Ratios
Lenders calculate your gross monthly income (sum of income before taxes or any deductions). They add up the minimal debts reflected in your credit report with any alimony or child support you must pay and mix it with the proposed mortgage payment. This sum is divided by the gross monthly income to ascertain your debt-to-income, or DTI, ratio. A homebuyer that earns $6,500 gross income every month with $700 of debt every month and wants to buy a house with a mortgage necessitating a $1,500 monthly mortgage payment has a DTI of $33.84 percent. This is well within most mortgage requirements. Most mortgage businesses want a DTI that does not exceed 40 to 45 percent.
Assets
Even if you’re ready to qualify for a zero down mortgage program, there are closing costs that must be paid when the loan closes. Some loan programs require the homebuyer to have reserves in the bank after all closing costs and the down payment have been compensated. Your lender will ask that you give asset statements documenting where the capital to close would be coming from.
What Not To Do
Do not make any major financial changes. Even though you’re preapproved, the lender may re-pull your credit report also will reverify the information which you gave. Do not make the mistake of purchasing a new automobile or obtaining any new debt–this may reduce your credit score because of the brand new trade line and cause your DTI to proceed above approved levels. Avoid jobs during the process. This may delay your full acceptance when a house is located, and if you’re using income such as bonus and overtime to qualify, they may be disallowed, therefore decreasing your DTI and causing the lender to diminish your loan.