Tips for Qualifying for a Mortgage
How Much House Can You Really Afford?
Before you even start thinking about qualifying for a mortgage with your financial institution, you need to decide how much debt you can afford. The best way to figure out how much house you can really afford is to base your decision on your monthly income. After all, you're going to pay your mortgage monthly, you pay your bills monthly, so it pays to know how much per month you can actually afford.
The traditional rule has been to spend roughly 1/3 of your monthly income on a mortgage payment. Some individuals and lenders will go as high as 45%, but more conservative institutions and individuals will want it to be more like 25% of your income.
So if your monthly income is $3,000, you would be paying somewhere between $750 (25%) and 1350 (45%). Most financial institutions now have online mortgage and loan calculators, so visit your institution's website and see what it says before asking your institution about qualifying for a mortgage.
Also, when making this decision, seriously consider the possibility of being laid off or hit with a serious financial issue and don't over-extend yourself. Don't let other people pressure you, and only stick with a loan that you feel comfortable with. Finally, it pays to know your credit score when making this decision.
Know Your Credit Reports
When qualifying for a mortgage, the first thing the financial institution providing your loan will check is your credit score (FICO score) from the big three credit reporting agencies: Equifax, Experian and TransUnion. The higher your score, the more likely you are to get a loan and the lower your interest rates will be. This is because your score is supposed to correlate with your credit risk: higher scores translate to less risky loans for banks, so the bank can offer better terms for the loan when you have a high credit score.
The primary factors on your credit score are your outstanding debt, and your history of payments. If you have a large amount of outstanding debt, and have a history of paying late, expect a lower credit score. Check your score and clear up any errors before you file for a loan, not after.
Preapproved and Prequalified Loans
Once you've established the kind of loan you'll need and gauged your personal financial landscape, your lender can provide you with a prequalification letter for a loan. This is a letter saying that, based on the information you've provided, it is likely that you will be approved for a loan of a certain amount. Note that this letter is not a guarantee, but it is helpful in providing you with a specific loan amount that you can begin shopping around with.
A preapproved loan is the next step beyond prequalification, as it is a guaranteed loan. It means that your lender has checked your credit,evaluated your financial situation and decided that you can be given a loan for a specific amount. Note, however, that although a preapproved loan means that you can get a loan, it's not an absolute guarantee that loan will be granted, because most institutions require an appraisal of the property, a title report and a purchase contract before the preapproved loan will actually be completed.