What is mortgage prequalification?

With prequalification, lenders determine if you meet the basic financial criteria for a home loan. To qualify first, give a lender basic information about your credit, debt, income, and wealth, and tell them how much you can borrow. “Say” is the keyword here. The information used for prequalification is reported. This means that the lender usually does not review them or review your credit report.

Using the prequalification calculator

Our prequalification calculator can give you an idea of ​​what to expect before talking to a lender. We just need information about you and your finances:

  • Enter your annual income before tax.
  • Enter the length of the mortgage you are considering.
  • Enter the interest rate for your mortgage type or use the current mortgage rate.
  • Choose your credit score range. (Not sure? Get your free credit score.)
  • Tell us about your professional situation.
  • Let us know when you have a down payment.
  • Tell us about any previous foreclosure or bankruptcy.
  • Enter your recurring monthly debt payments.

After you have completed all the required fields, you will see the loan amount we recommend as well as a higher loan amount. We show two prequalification amounts because:

Different loans have different debt income requirements. For example, conventional loans often have more stringent DTI requirements than FHA loans that are insured by the Federal Housing Administration.

It doesn’t always make sense to borrow 100% of a lender’s offer. The maximum loan amount is the higher the lender is willing to lend you, and not what makes sense for your budget. A higher loan amount means a higher monthly mortgage payment. Borrowing too much can make it difficult to deal with unforeseen financial problems like losing a job or having a large medical bill.

What is behind the calculation of the prequalification?

Debt to Income Ratio (DTI) is a formula commonly used by lenders to prequalify mortgages. There are two variations: front-end and back-end.

The starting DTI is the dollar amount of your house-related expenses, including future monthly mortgage payments, property taxes, insurance, and homeowners association fees, divided by your gross monthly income.

Your back-end DTI ratio is the sum of your household expenses plus all other monthly debt, including credit cards, student loans, personal loans, and auto loans, divided by your gross monthly income. Traditional mortgage lenders generally prefer a final DTI rate of 36% or less, but government-funded loan programs may allow a higher percentage.

What is the difference between prequalification and pre-approval?

Unlike pre-qualification, pre-authorization requires proof of your debts, income, assets, credit history, and credit history.

To get pre-approved, you will need to provide documents such as payslips, tax documents, and proof of assets. After the lender has reviewed your financial information, which may take a few days, you will need to produce a pre-approval letter that you can show a real estate agent or seller to show that you are ready and able to buy. a house.

Please note that prequalification does not guarantee prior approval. You can still be rejected if your financial records do not support the numbers you reported.

Does prequalification affect your creditworthiness?

Prequalification does not affect your creditworthiness. Lenders generally base their prequalification on the information you provide and will not receive your credit report.

When a lender checks your credit report, it is considered a “difficult investigation”. Too many difficult inquiries can lower your credit score if it turns out that you are trying to open many new lines of credit in a short period of time. Multiple applications in a short time due to mortgage rate research.

 

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