As you’re getting set to begin your foray into the home market with a search for a new home, one of the first possible steps in this process will be pre-qualification. This is where you chat with a mortgage lender about some general financial themes, and the lender gives you a basic estimate of what your purchasing power will likely be on the market based on the elements you discuss.
At Altius Mortgage and our partners with Mortgage Ogden, we’ll work with you through pre-qualification and the more in-depth pre-approval process for any mortgage loan you’re considering, whether you’re a first-time homebuyer or a seasoned real estate flipper. What are some of the basic elements that will be involved in pre-qualification? Here’s a simple primer.
Basics on Pre-Qualification
As we noted above, pre-qualification is the stage where you and a mortgage lender have an initial discussion about your borrowing power. This is generally done without regard to any specific property you may have in mind, and it’s meant to give all parties a broad sense of what to expect.
This process is much less involved than pre-approval, and does not require things like a credit report, tax returns or bank statements. You will, however, need to discuss your employment history, income, debts and other financial obligations.
Once all this information has been gathered, the mortgage lender can give you a broad idea of what kind of loan programs you may qualify for, how much money you might be able to borrow and what sort of interest rates you’ll likely see.
Our next few sections will go over the kinds of elements typically discussed during pre-qualification.
The simplest way to determine how much you’ll be able to borrow is to look at your current income. Most lenders will calculate what’s called your debt-to-income ratio, or DTI. This takes into account all of your monthly debts – things like credit card bills, auto payments, student loans and the like – and compares it to your gross monthly income.
For conventional loans, a ideal DTI tends to be around 36%, with some wiggle room on either side depending on your qualifications. If your DTI is significantly higher than this – say, north of 43% – you may still be able to qualify for a loan, but you’ll likely pay a higher interest rate as a result.
Another key factor in pre-qualification will be a review of your assets. Your lender will want to know what kind of savings or investments you currently have, as this can play into your purchasing power and the down payment you’ll need to make.
For example, if you have significant equity in your current home, that may give you more borrowing power on a new home. Or, if you have money set aside in a 401k or other retirement account, you may be able to use that as collateral for a loan. The key here is to be open and honest with your lender about all the assets at your disposal.
For more on what’s typically included in pre-qualification, or to learn about any of our mortgage rates or other home loan services, speak to the team at Altius Mortgage today.