Getting Pre-qualified for a Loan

Before you progress too far into the home-buying process, it’s a good idea to talk with a lender about pre-qualifying for a loan. Pre-qualification will let you know how much money you will be able to borrow, so that you know your price range for your home search. Having a pre-qualification letter also assures sellers that you are a serious potential buyer.

   How Much Can You Pre-Qualify For?

What you can afford will depend on your income and your debt. In general, lenders don’t want borrowers to spend more than 28 percent of their gross monthly income on a mortgage payment (your "housing expense ratio") or more than 36 percent on all debt payments combined (your "debt-to-income ratio.") They will define your total mortgage payment as the sum of your principal, interest, taxes, and insurance (known by the acronym PITI), and they will define your long-term debt as any monthly payments which will take ten months or more to pay off.

Low housing expense and debt-to-income ratios do not guarantee that you will qualify for a loan; neither do high ratios always signal a denial. In addition to your gross income and your current debt, potential lenders will consider these factors to determine how much you can borrow:

• The amount of cash you have available for the down payment investment, closing costs and necessary reserves
• Your credit history
• The type of mortgage you are considering
• Current interest rates
• It is true, however, that the more you increase your other debt, the less borrowing power you have for a mortgage.

 Follow these steps to get a general idea of how you will pre-qualify:

1. Calculate your gross monthly income.
2. Multiply your gross monthly income by 28% (.28). This is your maximum monthly housing expense payment.
3. Multiply your gross monthly income by 36% (.36). This is your maximum allowable total debt payment.
4. How much do you owe each month on long-term debt payments (e.g., credit cards, loans, child support payments, etc.)? Enter that number here.
5. Subtract line 4 from line 3 to determine the maximum amount you can spend on debt. This is the income you have available for your monthly mortgage payment.
6. Use the smaller of line 2 and line 5 as your maximum housing payment. Multiply that number by 75% (.75). (This assumes that 25% of your payment would be spent on taxes and insurance.)

Line 6 is the maximum monthly principal and interest you can afford. The following table will show you how the monthly payment relates to your loan amount.

What Lenders Want To See

We said earlier that potential lenders will consider six factors to determine how much you can borrow:

• Your gross income
• The amount of cash you have available for the down payment investment, closing costs and necessary reserves
• Your current debts
• Your credit history
• The type of mortgage you are considering
• Current interest rates
• To verify your income, you will need to provide your lender with
• Recent pay stubs
• Two years of W-2 statements
• Two years of federal tax returns
• To verify your available cash, your lender will want to see your two most recent bank statements for both your savings and checking accounts.

To verify your current debts and your credit history, your lender will order a copy of your credit report. Even if you don’t anticipate any problems, it's a good idea to order a copy of your report before you begin the loan application process. This will give you time to clean up any errors or problems that may show on the report.

You can obtain a copy of your credit report from one or all of the three credit reporting agencies:

• Trans Union (www.transunion.com / 1-800-888-4213),
• Equifax (www.equifax.com / 1-800-997-2493), and
• Experian (www.experian.com / 1-888-397-3742).

You can also look in the yellow pages under "Credit Reporting Agencies" for a location near you. The reports should cost under $10 each, and it’s a good idea to get a report from all three companies since they may not be exactly the same.

Thank You

Donna Massey-Trinkle & Duane Trinkle

Massey-Trinkle Team

Cotact Donna at dmassey@mibor.net

Contact Duane at dtrinkle@mibor.net

Talk to Trinkle at Tucker Today!