Assuming you think that you have the ability to purchase a home immediately thru the acquisition of a mortgage, is it a good idea for you to find the house you want to buy first or shop for the right mortgage loan first?
It is our opinion that you should "pre-qualify" for a mortgage before home shopping.
The term "Pre-Qualify" does not have a standard definition. In general terms it means that a lender feels you can borrow a particular amount under the rules for a particular loan program.
You want to pre-qualify before you enter the market place so you know how much house you can afford. If you pre-qualify with a lender you do not have to use that lender, but you may want to. Some lenders charge to pre-qualify, most do not.
With a pre-qualification, lenders will look at your income, debts, available cash, and credit. Many lenders will run a credit check as part of the pre-qualification process.
A lender will then provide a pre-qualification letter showing how much it is believed you can borrow. Most pre-qualification letters are NOT absolute loan commitments, but instead show that you have spoken to a lender and have a reasonable estimate of your borrowing ability.
The pre-qualification process help buyers better understand what they can afford and it also helps in the negotiating process. Show the seller a pre-qualification letter and it is clear you have a reasonable ability to finance a given amount of debt.
Question : I have worked in commissioned sales for the past 3 years and I've heard it's tougher for people on commission to qualify for a home loan. Is this true, and if so, what will the lender expect?
Answer : You are correct. People who work on commission are a little tougher to qualify, but not impossible. Some lenders average the past several years commissions based upon the theory that commission income is less predictable than strait salary. But, if your commissions have been steadily increasing, the lender could agree to put more weight on the current commission income. You will need to sell the lender on why this income is likely to continue, including documenting a stable client base, providing commission agreements and 1099's.
Question : Just when we thought we had enough down payment for our first home, we now find out that we have too many monthly payments to qualify. If we have good income and we pay on time, what difference does the debt make?
Answer : Lenders think it makes a lot difference. It is statically proven that the majority of mortgage defaults are caused by low down payments and high debts. So, the amount of debt you carry is very important when qualifying for a loan. The lender uses ratios (percentages) to determine the proportion of housing debt and total debt to gross income. Since a majority of the conventional loans are sold to a secondary market investor known as the Federal National Mortgage Association (Fannie Mae), their guidelines are often used as benchmarks.
In general Fannie Mae will allow up to a 28% of your gross monthly income to be contributed to your mortgage taxes and insurance payment and up to 36% can go towards your PITI payment plus your long term debt (obligations that can not be paid off in 10 months and/or are re-occurring in nature).
While most lenders use 10 months as a benchmark for long term debts, you local lender could choose to be more restrictive. For example, a lender might approve a car payment with 6 months remaining in a marginal buyers ratios. The rational is that the leverage of the additional new mortgage debt might strain the borrower in paying the loans and cause loans default.
Obviously, the more debt the borrower has, the more difficult it will be to fall into the proper ratios. You may want to evaluate which debts you can pay off or pay down below the qualification threshold. If some of the debts carry high interest and large monthly re-payments, consult with the lender to see if a debt consolidation loan would help, reducing your monthly payments.
You may need to prioritize your debts. Which is more important, the new car with a large monthly payment or qualifying for a home loan? You may consider selling the car and buying some older vehicle for cash.
It's best to take action to restructure your debts AFTER you pre-qualify with the lender. He/She can give you step by step instructions on how you can resculpt your finances to fit within the pre-qualification guidelines. (also see Credit Issues)
Question : We had a lender ask us recently if we had been "Pre-Approved" before. How does this differ from "Pre-Qualified" and is it necessary in making an offer on a house when financing is involved?
Answer : Pre-approved programs are a relatively new approach to qualifying. Designed to be more in-depth then pre-qualifying, it is used as a marketing tool for the lender and a transaction tool for the buyer.
Here's how it works. The lender gathers information from and about the buyer/prospect including a mortgage credit report, the last 3 bank statements, and the last 2 pay-stubs and perhaps copies of income tax returns. (The documents requested can vary based on the type of loan and lenders requirements.)
Based on the information the lender may pre-approve the buyer for a mortgage amount of "x" with a maximum interest rate of "y". The borrow now knows what they can afford, and can use the information to sell his offer to the seller. It gives the buyer the strength of being a "cash buyer".
The seller is assured that all things considered, the buyer is pre-approved for a loan and merely needs to select the house (although some pre-approval loans are conditioned upon the assumed acceptable appraisal).
Although pre-approval is not mandatory for making an offer, it can add strength to your buying position.
Generally no. Lenders have no assurance that such income will be regular and continuing.