The Prequalification and Preapproval Processes

Prequalification begins when you speak with a loan originator who calculates your debt ratios to find out how much money you can afford to borrow and repay. Before you make your call to a loan originator, you’ll need to be ready to answer the following questions:

How much money do you make every month?

How’s your credit?

How much money do you have available for a down payment and closing costs?

Calculating Debt Ratios

Prequalification is first determined by calculating a debt ratio. To do so, the loan originator will take your gross monthly income, estimate a mortgage payment then add any other regular credit obligations such as a car loan, credit card payments, or student loan payments.

Your loan originator will ask about your credit and how much money you have available to buy a home and give then you a general range of how much house you can qualify for.

The Preapproval Process

A mortgage loan prequalification is simply an estimate of how much house you can afford and how much money a lender would be willing to loan you. When you spoke with a loan originator over the phone and they ran your numbers, you probably came away with a general idea of what you are able to afford. However, you didn’t find out if a lender would actually approve a loan for you. That’s because loan originators need more than just verbal confirmation that your credit is good and that you have a steady income. They’ll want to verify that information by reviewing your credit report, paystubs and tax returns.

In a sense, the preapproval process begins the process of getting everything in order so that all you need to do next is find a home to buy. The first step is to complete a loan application. This can be done, over the phone, in person, or most often today, online. Once complete, the lender will review the information and verify the income and assets. Your credit report will be reviewed as well and merged into your loan application.

Experienced loan originators should know in advance whether or not the loan will receive preapproval. Some tipping points would most likely be a high debt ratio, or a low credit score. Most loan originators will be able to give you a fairly accurate idea even before you complete the loan application.

Once approved, you should receive a preapproval letter that you can present to a seller with your offer to let them know that you have the financial capability to purchase their home.

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