Prequalifying Yourself for a Mortgage Loan

Prequalification is typically the first timid steps most homebuyers take when looking for a new home. The prequalification provides a practical estimate of how the buyers can afford, based on their income, credit and objectives. Prequalification can be done in one of two ways:

• Have a reliable mortgage lender prequalify you.
• Prequalify yourself

Either way, the information provided in this section will give you an insight to how lenders approach loan applications. Qualification issues all revolve around money.  In real estate, money normally means mortgage loans. When a mortgage lender underwrites your mortgage loan application, it has dozens of elements and issues that it must consider prior to approving the loan application.  These approval guidelines and restrictions are set by the government, related institutions and the lender itself. The bulk of these restrictions and requirements fall within four categories:

• Property. The type of property determines down payment requirements and limits the programs available for the borrower.
• Assets. The buyer must demonstrate that he or she has enough funds for the down payment, projected closing costs and reserve requirements.
• Credit rating. The borrower’s credit grade limits the programs available for the buyer.  Lower credit ratings often require larger down payments, higher interest rates and more restrictions.
• Employment and income. The borrower must document and verify at least two years continuous employment, although exceptions are allowed for recent military service or academic studies.  The borrower must also demonstrate that the projected monthly housing payments, plus monthly payments on all other long-term debts, are within the debt-to-income (DTI) ratio limits.

Your Mortgage Self-Qualification Checklist

After reviewing the prequalification elements in this section, you can use this handy checklist to determine what you need to address in order to get final mortgage loan approval.

What type of property will you be seeking (condo, single-family, 2-flat)?  _______

What is the minimum down payment required for that property?  _______%

Do you or will you have the funds for this down payment?  _______

What are the projected closing costs?  _______

Do you or will you have funds for the projected closing costs?  _______

What are the projected requirements for the escrow accounts?  _______

Do you or will you have funds for the escrow accounts?  _______

What are the program’s reserve requirements?  _______

Do you or will you have funds for the program’s reserve requirements?  _______

Based on the above credit grading matrix, what is my credit grade?  _______

Does your employment meet the conforming criteria above?  _______

What is my projected housing (front-end) debt ratio?  _______%

Does my housing (front-end) ratio meet conventional limits?  _______

What is my total long-term (back-end) debt ratio?  _______%

Does my total long-term (back-end) ratio meet conventional limits?  _______