Published on November 12, 2019 under First-Time Home Buyers
When you initially set out to purchase a new home, the home seller and the real estate agent you engage would want to know whether you can actually afford the home or not. You would also want to know too. If anything, if you can't afford it, you'd be wasting everyone's time, including your own. Affordability aside, the pre-qualification process can help you to discover other factors that disqualify you from obtaining a mortgage. These other factors aren't always obvious, especially if you are a first time home buyer who had never obtained any home loan before. You might think you'll easily qualify for a loan, but because of the ever-changing and nuanced mortgage landscape, it's better to be 100 percent sure. Your real estate agent and the home sellers would also want to be certain that you're committed to buying the home, as opposed to someone who's just casually browsing. For these reasons, most real estate agents will demand that you get prequalified for a mortgage loan before they move with you to the next step.
Why You need a Mortgage Pre-Qualification
The very first step in getting a mortgage is to get pre-qualified. This step isn't very robust because it's only meant to determine whether you can purchase the home you desire before you make any serious commitment.
Pre-qualification:
- is an expeditious way to determine if you qualify for a mortgage
- doesn't require a credit score
- doesn't require bank statements, tax documents, or other information that need verification
- is simply the first step to get you to the next step
- is what Loan Officers look for when pre-qualifying you
You can get pre-qualified easily and quickly with even a mortgage or bank broker, but the seller or the agent may not rely on it to process your loan. This is because a pre-qualification simply supplies the estimate of what's in your savings account and how much you make. Here are what loan officers look for to come up with such an estimate:
Your Income
Even though you can pass a credit test easily if you've been paying your taxes and repaying your loans on time, your income plays a big role in pre-qualifying you for a loan. Lenders want to know how much you are making per month or per year. This enables them to be confident that the much they lend you will not be at risk because you are making a reasonable amount.
Your Debt-to-Income Ratio
The debt-to-income ratio is a comparison between your income and your total debt. It has great bearing on whether you can qualify to get a mortgage. The lending agency will look at the much you are earning and how much you are spending on servicing your debts every month. As a rule of thumb, you should have a low DTI ratio to qualify for a loan. Some lenders accept a DTI of 50% while others want lower figures. You need to find out what DTI ratio is acceptable to your potential lender.
Your Assets
Lenders are also interested in what you own in terms of assets so you may need to provide the details of the same. These may include 401k, stock dividends, savings accounts, and so on. Your assets will assist the lender in determining how much you are able to pay to know what level of credit they can extend to you. Your assets will also show the lender that you can comfortably make the down payment and the closing payments. Some lenders may also require you to meet cash-preserve requirements. All in all, pre-qualification is a very necessary step in determining whether you can qualify for a mortgage. When you fail to pass this step, it would be a waste of time to try to apply for a loan. You can reach out to a loan officer if you are ready to get pre-qualified or are interested in more information to become a borrower in the future.
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FAQs
Key Takeaways
Can a pre qualified loan be denied? ›
There are a variety of reasons why your loan preapproval may have been declined by the lender. Some common reasons for denial could include: Your credit score is too low. You don't have enough credit history.
What do they look at when qualifying for a mortgage? ›
Applying involves submitting your financial information to verify things like income, assets and employment. The lender will also pull your credit report to see if your credit score is at or above the minimum requirement (usually 620 for a conventional mortgage) and if you've handled debts reliably in the past.
What does it mean to be pre qualified for a loan? ›
Both pre-qualified and pre-approved mean that a lender has reviewed your financial situation and determined that you meet at least some of their requirements to be approved for a loan. Getting a pre-qualification or pre-approval letter is generally not a guarantee that you will receive a loan from the lender.
What do banks check for pre approval? ›
This pre approval has generally gone to a human that actually sits there and looks at your payslips, your bank statements, your financial situation and your savings to see if they are genuine.
Why would a pre-approval fall through? ›
Missed payments or a lower credit score
If you miss credit card payments or get behind or bills after pre-approval, a lower credit score could result in a denial on your mortgage. Keep your credit score up by paying off debts where possible and paying on time.
Is it common to get denied after pre-approval? ›
A mortgage that gets denied is one of the most common reasons a real estate deal falls through. When a buyer's mortgage is denied after pre-approval, it's in most cases the fault of the buyer or the lender that pre-approved them. Many of the reasons a mortgage is denied after pre-approval are actually fairly common.
What are red flags on bank statements? ›
Red flags on bank statements for mortgage qualification include large unexplained deposits, frequent overdrafts, irregular transactions, excessive debt payments, undisclosed liabilities, and inconsistent income deposits, which prompt lenders to scrutinize the borrower's financial stability and may require further ...
What disqualifies you from getting a mortgage? ›
If the declination letter doesn't specify a reason, contact the lender to ask. Most often, loans are declined because of poor credit, insufficient income or an excessive debt-to-income ratio. Reviewing your credit report will help you identify what the issues were in your case.
What 3 factors are considered in qualifying for a mortgage? ›
Let's begin by looking at the major factors lenders first consider when they decide whether you qualify for a mortgage. Your income, debt, credit score, assets and property type all play major roles in getting approved for a mortgage.
While prequalification is a good first step, it typically won't carry as much weight as a preapproval because a lender hasn't verified your information. Going beyond prequalification and getting preapproved by a loan officer is a critical step that shows you're serious about buying a home.
Is it better to be pre qualified or pre approved? ›
Pre-qualification means that the mortgage lender has reviewed the financial information you have provided and believes you will qualify for a loan. Pre-approval is the second step in the loan process, which is a conditional commitment to loan you the money for a mortgage.
Do lenders pull credit for pre-qualification? ›
When you get prequalified, you are only telling lenders what you earn each month. Lenders then estimate how much of a loan you can get from your information, but they don't check your credit or verify your income. Sellers don't consider prequalified buyers to be as reliable as preapproved ones.
What affects your pre-approval amount? ›
Before a lender grants a preapproval, they will look at your complete financial picture, including information about your income, assets and credit score. To do this, you'll need to submit specific documents that are required by your lender as proof that you can afford the loan's monthly payments.
What happens during a pre-approval? ›
Pre-approvals are generated through soft inquiry analysis which allows a lender to analyze some of a borrower's credit profile information to determine if they meet specified lender characteristics.
What determines your pre-approval amount? ›
What Determines Your Preapproval Amount? Lenders base your preapproval amount on the risk they take to loan you money. In other words, you can get preapproved for a higher amount if your financial history shows that you have a higher likelihood of making payments consistently and on-time.
Are you guaranteed to get a pre-approved loan? ›
When you're pre-approved for a loan, it means the lender provisionally agrees to lend you the money, based on the preliminary information you give them. It doesn't mean you are guaranteed to get the loan. Final approval for the loan will be subject to a hard credit check and other final checks.
Does pre qualification guarantee a loan? ›
A prequalification or preapproval letter is a document from a lender stating that the lender is tentatively willing to lend to you, up to a certain loan amount. This document is based on certain assumptions and it is not a guaranteed loan offer.
Are you guaranteed a loan if you are pre-approved? ›
A preapproval letter is based on assumptions and it is not a guaranteed loan offer. But, it lets the seller know that you are likely to be able to get financing. Sellers frequently require a preapproval letter before accepting your offer on a house.
What are the disadvantages of prequalification? ›
This can result in delays in the procurement process and potentially impact project timelines. Limited pool of partners: Prequalification may result in a limited pool of potential partners for a project. This can be especially challenging in regions where the number of qualified partners is limited.
