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What Determines Your Mortgage Prequalification?

by Jann Seal

Prequalifying for a mortgage before shopping for a new home is a must in the current market. It’s wise to know how much you can afford, what your mortgage payments will be and how much you’ll have to budget for taxes, insurance and, if necessary, homeowners association dues. Meet with a lender, and only when you get your mortgage pre-approval letter should you start looking for a home.

The Lenders

Whether you’re applying for a conventional, government-backed or Department of Veterans Affairs loan, a lender prequalifies you, not the institutions. Meet with the mortgage officer at your local bank, a mortgage broker who’s been referred, or a lender who specializes in the type of loan you want. All require similar information in order to determine your qualifications for a loan.

Debt-to-Income Ratios

The primary prequalifier for mortgage lenders is your debt-to-income ratio. Two factors are calculated: the front-end and back end percentages. Your front-end DTI is your gross income minus your projected monthly mortgage payment. The ratio should be no more than 28 percent. Multiply your monthly income by .28 to get the number you qualify for as payment on a mortgage. The back-end DTI includes all of your monthly debts: student loans, credit card payments, car payments. This ratio should be no more than 36 percent. FHA prequalification is more lenient in DTI ratios, requiring a back-end of under 43 percent. If you fall within these parameters, you’ll prequalify.

Documentation

All lenders require proof of steady income for the past two years to prequalify for a mortgage. If you haven’t been with the same employer for that period, be prepared to show a consistent income stream and where it came from. Income tax returns and pay stubs help prove your income. Bank statements showing deposits for a down payment and additional funds to cover emergencies must also be presented. In most cases, you’ll need a minimum credit score of 620 and no more than two 30-day late payments on your record. All lenders are flexible in credit score qualifications, but the lower your score the more money you’ll need as a down payment, and the higher your interest rate will be.

Past History

If you’ve had a short sale or foreclosure in your past, the waiting period to prequalify for a mortgage loan varies. The minimum wait is two years to get a VA loan, if your previous loan was not through the VA. Wait three to seven years to qualify for a government-backed or conventional loan. A bankruptcy puts you out of the mortgage market for two years. Use that waiting period to repair your credit and put money in the bank. Prequalify after a short sale, foreclosure or bankruptcy by staying on top of your expenses with on-time payments to all creditors. A secured credit card often rolls over to an unsecured card after a period of time, reflecting your credit worthiness.

About the Author

Jann Seal is published in magazines throughout the country and is noted for her design and decor articles and celebrity *in-home* interviews. An English degree from the University of Maryland and extensive travels and relocations to other countries have added to her decorating insight.