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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.

Every F. C. Tucker office has a Loan Officer located on site to help you understand your options. Pre-qualifying with a lender does not obligate you to finance your mortgage through that company.

For more information, continue reading or follow one of these links:

How Much Can You Pre-Qualify For?

What Lenders Need to See

Correcting Credit Problems

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.

Monthly Mortgage Payment Table
30-Year Term
Loan Amount

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

$25,000

$150

$158

$166

$175

$183

$192

$201

$210

$219

30,000

180

190

200

210

220

231

241

252

263

35,000

210

221

233

245

257

269

282

294

307

40,000

240

253

266

280

294

308

322

336

351

45,000

270

284

299

315

330

346

362

378

395

50,000

300

316

333

350

367

384

402

420

439

55,000

330

348

366

385

404

423

443

462

483

60,000

360

379

399

420

440

461

483

505

527

65,000

390

411

432

454

477

500

523

547

570

70,000

420

442

466

489

514

538

563

589

614

75,000

450

474

499

524

550

577

603

631

658

80,000

480

506

532

559

587

615

644

673

702

85,000

510

537

566

594

624

654

684

715

746

90,000

540

569

599

629

660

692

724

757

790

95,000

570

600

632

664

697

730

764

799

834

100,000

600

632

665

699

734

769

805

841

878

110,000

660

695

732

769

807

846

885

925

965

120,000

719

758

798

839

881

923

966

1009

1053

130,000

779

822

865

909

954

1000

1046

1093

1141

140,000

839

885

931

979

1027

1076

1126

1177

1229

150,000

899

948

998

1049

1101

1153

1207

1261

1316

160,000

959

1011

1064

1119

1174

1230

1287

1345

1404

170,000

1019

1075

1131

1189

1247

1307

1368

1429

1492

180,000

1079

1138

1198

1259

1321

1384

1448

1514

1580

190,000

1139

1201

1264

1329

1394

1461

1529

1598

1667

200,000

1199

1264

1331

1398

1468

1538

1609

1682

1755

What Lenders Need 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:

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.

Correcting Credit Problems

Your first credit problem may be lack of a credit history. You can approach this problem in a couple of ways. First, you can begin to build your credit by getting a credit card and charging small amounts on it. By paying it off each month, you will be establishing a positive credit history without incurring finance charges. Second, you can ask your lender to establish a nontraditional credit history which uses payment information from monthly obligations other than loans: utility bills, rent payments, telephone bills, etc.

If you have a credit history, the credit report will list all of the consumer credit that has been extended to you in the last seven years. For each account, it will show:

  • A comment about the account such as current or delinquent (and if delinquent, for how long)
  • The status of the account: positive, non-evaluated or negative
  • The date the account was opened
  • Scheduled monthly payment amounts
  • The date the last payment was made
  • The type and terms of the account
  • Your payment history over the last 12 months
  • The original loan amount, credit limit or original amount charged to loss
  • The balance owing and amount past due, if any.
  • If a payment was over 30 days late one time, it might not show on the report. If, however, payments were over 60 days late four times, over 120 days late two times, or over 180 days late one time, your credit will be seriously affected, and this will impact your ability to borrow money.

Sometimes problems will crop up on a credit report because there has been a misunderstanding or error. If you find such a problem on your report, contact the billing department for that account and have them correct it. Keep written copies of your correspondence and keep notes of phone conversations which include the names of the people with whom you have spoken, the dates of the calls and the outcome of each call. Write a letter explaining the error to the lender and attach it to the credit report. Submit copies of your written correspondence and notes from conversations with the creditor as further documentation.

If a poor credit rating is the result of past problems, you need to be aware that there are no quick fixes for a poor credit history. Be patient, and improve your credit rating by

  • Contacting each creditor and explaining your situation. Send a good faith letter demonstrating your willingness to pay off the account and include at least a partial payment, if possible.
  • If credit problems are associated with a specific incident such as a car accident, sudden illness or loss of a job, write a letter of explanation to the credit bureau explaining the circumstances.
  • If you have outstanding collections or judgments against you, take steps to pay them off. Contact the creditors and begin making regular payments, however small.
  • Always include your name, address, telephone number, and account names and numbers on any correspondence with creditors, credit bureaus and lenders. Let them know when and where you can be reached.
  • As a last resort, get professional assistance from a nonprofit credit counseling service, but be aware that they are primarily representing your creditors' interests. They will make arrangements with your creditors to pay off a percentage of your debt, spread over a longer period of time so that your monthly payments are lower. Then they will arrange with you to pay a higher percentage of the debt, and they pocket the difference. They do nothing to resolve the bad credit history that drove you to them in the first place.
  • There is hope even if your credit rating is not what it needs to be. Remember that negative credit information is only reported in your credit file for seven years (with the exception of bankruptcy which can be reported for ten years). After that, it drops out and cannot even be considered, and you have essentially a clean slate.

Additionally, lenders are much more concerned with how you have handled your credit recently than with what happened several years ago. If you had problems in the past but have paid your bills on time since, you may qualify for a loan after as little as two or three years.

Some lenders have begun offering risk-based pricing. In other words, even if you have slightly damaged credit, you may still be able to get a loan; you’ll just pay more for it.

Next>>

F.C. Tucker on "Buying Your First Home"