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PREQUALIFICATION
Before you begin to shop for a home, the best thing you can do is ask your lender to
prequalify you. The prequalification process will help you determine precisely how much
home you can afford.
Three factors will be considered: your down payment, your ability to qualify for a
mortgage, and closing costs.
DOWN PAYMENT
Most conventional loans today require a minimum down payment of at least 5 percent, but
often 20 percent or more is necessary to get the lowest rates available. By increasing
your down payment, you may be able to take advantage of special programs from some lenders
that can close the loan in 10 days or less.
QUALIFYING
Lenders primarily are concerned about your ability and willingness to repay the loan, and
the underlying value of the property. Most lenders require that your monthly mortgage
payment (principal, interest, taxes and insurance, or PITI) range between 25 percent and
28 percent of your gross monthly income. Your monthly payment for all debts, from
installment to revolving charge accounts, should range from 33 percent to 38 percent of
your gross monthly income. Both ranges are just a general rule of thumb.
Four key factors specifically determine your
ability to qualify for a home loan:
Income:
In addition to gross monthly income, this factor includes history of employment, stability
of income, potential for future earnings, education, vocational training and background,
and any secondary income, such as bonuses, commissions, child support, and dividends.
Credit Report:
This encompasses your history of debt repayment, total outstanding debt and highest
balances achieved. In many cases, your highest monthly debt balance can be a factor in
determining your credit-worthiness.
Assets:
This is calculated by cash on hand and other liquid assets for the down payment, including
savings accounts, current checking account balances, CDs, stocks, bonds or other
investments. If you are receiving your down payment as a gift, that may be considered an
asset too.
Closing Costs:
At closing, you will be required to pay fees other than the down payment. These fees must
be paid in cash unless you choose, and are able, to include them in your financing. Most
lenders must provide you a "Good Faith Estimate" of closing costs for
single-family residential purchases within three days of receiving your loan application.
Typically, these total closing costs will range between 2 percent and 6 percent of your
mortgage loan, depending on the loan and lender. Included in these fees are the closing
agent's fees as well as the lender's "points". A point is a one time charge
equal to one percent of the loan amount. Your Good Faith Estimate will tell you what to
expect. Don't be afraid to ask for an explanation for each fee listed. |
