With the current housing market conditions, it’s a good idea to get set up with a lender before you start actively looking for a home. Before you talk to lenders, it’s a good idea to have a little bit of knowledge, so that you can better understand what they tell you.
PRE-QUALIFICATION VS. PRE-APPROVAL
Pre-Qualification takes almost nothing to get (assuming you meet the requirements) and can sometimes even be done over the phone. Without at least a letter of pre-qualification, any offer to purchase a home cannot be taken seriously by the seller.
Pre-Approval takes time, paperwork, and represents a commitment by the lender (usually subject to certain conditions including things like appraisal of the property, etc.). Pre-Approval makes any offer more attractive and can easily be the deciding factor in cases where there is more than one offer.
CREDIT REPORTS and CREDIT SCORES
Credit reports come from agencies like Equifax, who tabulate data submitted by banks, credit card issuers, finance companies, etc. Not every lender reports every late payment, but if they do, your credit report will show it for seven to ten years.
Credit Scores are what lenders use to get the big picture. They are based on debt to income ratios, credit history, bank balances, factors affecting net worth and a host of other factors.
The percentage of your gross income that goes to pay off long term and revolving debt is your debt ratio. It includes your mortgage, property taxes and insurance, car payments, credit card debts, etc. Your credit score determines what lenders will consider an acceptable debt ratio. Acceptable debt ratios tend to range from 28 to 40 percent of gross income.
POINTS, ORIGINATION FEES, and MORE
A “Point” is one percent of the amount borrowed to be paid by the borrower when the loan is made. A Loan origination fee is a specified amount the lender charges, sometimes in lieu of points, sometimes in addition to points. You can also expect to pay for some incidentals like property appraisals. Note that most lenders offer a trade-off between points, and interest rates. You can pay more points to get a lower interest rate, and vice-versa.
Lenders May Want To See:
- Pay Stubs
- Proof of other sources of income
- Bank statements
- Tax returns
- Credit reports (they’ll get them on their own)
When giving financial statements and the like to lenders, ALWAYS give them copies. Under no conditions should you give them the originals.