Quick Guide to Mortgage Qualifications
January 29th, 2014 at 4:53 pm by Gary Mawson Jr.
When you are getting ready to purchase a home the first thing that you have to do is get a pre-approval letter from your local bank or mortgage lender. This can be accomplished simply by picking up a phone and calling your local lender. There is no need for you to go and visit them in person. So the first thing that will happen is the mortgage lender will take what is known as the 1003 form (simply put a mortgage application). This consists of your name, address, SSN, Date of Birth, employer info, and bank information. Don’t be shy on this, they are going to get the information either way because they are going to ask for verification of all of this. They will than take this information and run a credit report on you, with your permission of course.
Your credit report will tell your story. It really has a lot of pertinent information for the mortgage lender to make a preliminary decision on whether or not you can truly qualify for a mortgage. If you have never seen a credit you can request a free copy of your credit report by clicking here. Your report will show all of your current debt as well as past accounts in the last seven years that may be inactive or closed. Your score is determined by your length of credit and good standing (this is very basic explanation). All of your creditors such as credit cards, car loans, student loans, etc… report what the credit limit is, how much is owed and also what your minimum monthly payments are. They use these numbers in conjunction with what your income is to determine what is known as the debt to income ratios are.
Your debt to income ratio will greatly determine what you can afford. The guideline for this is 25% front end ratio, which is the payment of what the mrotgage would cost you compared to your monthly gross income (before tax payments). The back end ratio is 36%, which is the mortgage payment with all of your debts included compared to your monthly debt. Although some lenders have flexibility on both of these numbers with exceptions, these are what the guidelines are for debt to income ratios.
Once they determine what you can afford than they will ask you for a series of documents. Last two years of w2’s and tax returns (this will determine an exact salary number), 2 months of bank statements (this is where your down payment money will come from), and 1 month of your most recent paystubs (verifies that you still make what you did the previous year. After all of this is compiled the bank may ask you for additional information as they deem necessary. If you are self employed be ready to supply much more paperwork in addition to all of this. For instance they are certainly going to ask you for your schedule C.
So some common things that you should avoid doing are making large purchases. If you are planning on buying or trading in your car, contact your mortgage rep first to make sure how it can affect your mortgage. Any large deposits that you make from two months prior to application to the end will have to be accounted for, where it came from and shown. This would include if you get bonuses that vary from month to month.
I understand that this is a lot of information, but this is more so that you can be prepared and informed as you navigate through the process of purchasing a home. If you are still confused we can help make this process less stressful for you.