The first step in the mortgage process is pre qualifying, which will determine how much a lender will lend you. Most lenders use national guidelines to determine the maximum amount that they will lend. Within the context of these standards, some lenders choose to be lenient and flexible, while others are strict. To pre qualify you, lenders look at the following information:
Unemployment is one of the two largest causes of mortgage foreclosure, the other being divorce. Ideally lenders like to see an employment history of 2+ years with the same company, or in the same line of work. A few job changes with increases in salary and responsibility are not frowned upon. Stability of income is a very important factor to mortgage lenders when they pre qualify you. For salaried employees, lenders look at job history for at least the past two years. For those who are self-employed, considered if you own a 25% or greater interest in the business that employs you, lenders will look at profitability and cash flow of the company and also personal income.
Credit history and scores can play a big role in the pre qualifying stage in the mortgage process. Lenders order mortgage credit reports from local credit bureaus, which gives individual credit history and scores. Credit bureaus collect information from retailers, banks, finance companies, mortgage lenders, and a variety of public sources on all consumers who use any type of credit, including credit cards, car loans, mortgages, personal loans, and charge accounts. The credit score is based on a statistical analysis of your credit history. Factors that determine your credit score vary from company to company, but generally include:
The credit score many lenders use is the FICO score. FICO scores range from 400 to 900, with 900 being the best score. The higher the score, the less likely there will be a default on a mortgage. Therefore, the better the score, the easier it is to pre qualify. These scores are viewed as very accurate predictors of future delinquencies.
The size of the mortgage that can be afforded monthly, can estimated through two essential ratios: housing ratio and debt ratio. Housing ratio is determined by your total monthly mortgage payment divided by your total monthly income. Debt ratio is determined by the sum of your total monthly mortgage payment and other fixed monthly debt payments divided by your total monthly income. If these ratios are too high, lenders may decide to deny the application. For pre qualification purposes, the maximum housing ratio of 28% and a maximum debt ratio of 36% (28/36) used to be national guidelines. However, today, you can get by with much higher percentages, if you can show that you can make the payment.
Some lenders evaluating a credit application are not tied down by strict industry standards. They will look at your loan request and see if it makes sense. If further explanations of any situation that will make your application look better, then by all means do so. Document all claims and explanations in writing if possible.
Stability helps, 2+ years in same line of work - income fixed or increasing
Cancel cards you are not using.
Clear any bad credit
Make sure it is accurate
Not too many requests for credit
Check your own credit before hand
28% of gross income or 36% of all Recurring Expenses is a general rule, but your Loan Officer can usually help you qualify for higher ratios
Shorter lock periods will lower interest rate, but lock periods of 30-45 days are highly recommended