How to Pre-Qualify for a Mortgage

Shopping idly for a home may be pleasant, but serious homebuyers need to start the process in a lender’s office, not at an open house. As a potential buyer you benefit in several ways by consulting with a lender and obtaining a pre-approval letter from your mortgage broker

First, you have an opportunity to discuss loan options and budgeting with the lender. Second, the lender will check your credit and alert you to any problems. Third, you will learn the maximum amount you can borrow, which will give you an idea of your price range. However, you should be careful to estimate your comfort level with a given house payment rather than immediately aiming for the top of your spending limit. Lastly, most home sellers expect buyers to have a pre-approval letter and will be more willing to negotiate with you if you have proof that you can obtain financing.

1. Proof of Income

Income verification is a basic part of applying for a home loan. But there’s more to providing proof of income than just handing over a couple of paystubs. You need to be able to show your earnings are stable. When making a down payment, you may have to be able to show the source of that money as well. If you’re a recent graduate who’s landed a well-paying job, someone who recently switched careers or just started a business, you could have trouble qualifying for a conventional mortgage no matter how much you’re earning, unless you can show your earnings are stable.

2. Proof of Assets

It’s important to have your assets in a verified account at least two months prior to applying for a home loan because banks and lenders generally ask for your two most recent bank statements t.o verify your assets for down payment, closing costs, and reserves Many prospective homeowners and those looking to refinance make mistakes when handling their assets prior to a mortgage transaction. They may falsely assume they can just shuffle some assets from a friend or family member’s account into their own bank account without incident, then use them to qualify for a mortgage. Unfortunately, this doesn’t fly with many banks and mortgage lenders because the money isn’t properly sourced or seasoned. Banks and lenders want to ensure the money is truly the borrower’s money, and in the borrower’s account for several months before they’ll accept those assets as their own. If it just appears out of thin air one day, the lender won’t feel very comfortable about the legitimacy of those funds. For example, attempting to use mattress money for your down payment likely won’t go over well. You might think, why not!? It’s my money, my hard-earned cash, why can’t I use it? Well, the lender doesn’t know where that money came from if it just appeared in your bank account a couple days ago. Could you have taken out an undisclosed loan, borrowed money from someone, or acquired funds another way that could make you a riskier borrower than you appear? Sure and absolutely. This is why mortgage lenders typically want to see that any assets used in the mortgage transaction are seasoned for at least 60 days. Put simply, this means providing two months of bank statements that show the funds being present in the account for that entire duration.

3. Good Credit

Credit scores signify your trustworthiness to financial institutions and can determine how easy, or how expensive, it is for you to get a mortgage. To determine your ability to pay, lenders look at your score and they prefer you to have “good” or “excellent” credit — to the point that having “excellent” credit can save you thousands of dollars, according to financial website NerdWallet. A score of 750 to 850 is considered “excellent”; a score of 700 to 749 is considered “good”; a score of 650 to 699 is “fair”; and a score of 300 to 649 is “poor.” Scores range from 300 to 850 based on major scoring systems FICO and VantageScore. “If somebody has a high score, what that shows us is that they’ve been good on meeting their obligations, whether it be credit cards, car loans or other home loans, ” Brian Hoovler, branch operations assistant manager at Bay Equity Home Loans, tells NerdWallet. “It means we’re more likely to want to give you a loan, because we know you’re going to pay us back.” While it’s up to the lender to determine the specific interest-rate parameters attached to your loan, the difference of a few points on your credit score could add up in a big way. If your score falls below 700, you could end up paying a lot more.

 

FICO Score Range

 

620-639

 

640-659

 

660-679

 

680-699

 

700-759

 

760-850

 

Interest Rate

 

5.953%

 

5.407%

 

4.977%

 

4.763%

 

4.586%

 

4.364%

 

$350,000 loan

 

$2,088

 

$1,967

 

$1,874

 

$1,829

 

$1,791

 

$1,745

 

$250,000 loan

 

$1,491

 

$1,405

 

$1,339

 

$1,306

 

$1,280

 

$1,247

 

$150,000 loan

 

$895

 

$843

 

$803

 

$784

 

$768

 

$748

4. Employment Verification

Mortgage lenders usually verify your employment by contacting your employer directly and by reviewing recent income documentation. The borrower must sign a form authorizing an employer to release employment and/or income information to a prospective lender. At that point, the lender typically calls your current employer to obtain the necessary information, such as income, position title and length of employment with the company. The lender may also inquire about the likelihood of your employment to continue. Also, while lenders usually only verify the borrower’s current employment situation, they may want to confirm previous employment details. This practice is normal for borrowers who have not been at their current company for at least two years.

The Bottom Line

Consulting with a Zillow before you start the home-buying process can save a lot of heartache later, so gather your paperwork or print some recent statements off your online bank accounts before your pre-approval appointment and before you begin house hunting.