November 9th, 2016 5:10 AM by Jackie A. Graves, President
It’s the biggest hack to homeownership, and probably the most
misunderstood: a home loan preapproval. How do you know when you’re financially
set to get preapproved? Here’s what lenders look for and what you need to do if
you’re not quite there.
Unlike a mortgage pre-qualification, a
preapproval is more than just a conversation with a lender. You’ll have to
submit quite a bit of paperwork, including employment verification and
checking, savings and investment records. The lender will pull a credit report
The elements lenders look for
in mortgage preapproval are the same industrywide:
Usually, there’s no charge to
apply for a mortgage and gain a preapproval, though some lenders will seek
reimbursement for the fee to pull your credit.
The two-year employment history
rule has a little leeway; for example, if you are a recent graduate and have
proof of future income from your employer. However, transitioning from a W-2
pay stub job to self-employment — without a two-year track record for your new
business — is a “definite hard stop in today’s mortgage world,” Don
Bleuenstein, national sales director of retail home lending with Flagstar Bank
in Troy, Michigan, tells NerdWallet.
He says a credit score of at
least 620 is a “fairly hard rule.” But your credit score, which you can often
obtain free of charge from a credit card company or bank, may not tell the
whole story. While it’s hard to crack the code of all the different credit
score models, Bleuenstein says that, in his experience, credit scores used for
mortgages are tougher than the consumer credit FICO scores that have become
This may be because for
mortgage credit scores, it is your middle score that counts among the three
providers, TransUnion, Equifax and Experian.
Also, you probably can’t count
on your spouse’s or partner’s pristine credit score if the home will be in both
your names. With two or more borrowers, the worst scoring party’s middle score
is used, Bleuenstein says.
“The ability to budget and save
shows financial discipline,” says Staci Titsworth, regional manager for PNC
Mortgage in Pittsburgh. “Sometimes clients receive gift money, and that’s fine,
or they get a big bonus, and that’s great. We just have to show the underwriter
the source of where those monies came from and that the monies were not
However, lenders know we don’t
live in an ideal world, she says.
“Let’s face it, nobody’s
perfect,” Titsworth says. “Life is not perfect. There are bumps in the road.
People lose jobs; people experience job changes. People have unexpected
expenses that they have to dip into their savings for. With that, it’s all
about the documentation. It’s all about presenting their information to the
underwriter that explains the financial ability to repay the mortgage.”
As for debt and income,
Bleuenstein says lenders are looking for a debt-to-income ratio of 43% or less.
That amount, called a back-end DTI, includes your
“So if you make $10,000 a month
gross [before taxes], $4,300 is what all of your debt on your credit report
needs to be under,” he says, including your future house payment, monthly
property taxes and homeowners’ insurance as well as your credit card, student
loan and/or car payments.
But the numbers have a little
wiggle room. Say your DTI is a bit high, perhaps 46%, but you’ve got a good
credit score — for example, somewhere around 700 — and you have a 5% down
payment in the bank; in that case you probably would get mortgage preapproval,
Seeking a preapproval long
before you start house hunting will accomplish one important goal: alerting you
to any qualifying issues you may not be aware of.
“What’s prudent is: Get
preapproved now if you think you’re going to buy in the next year,” so you have
time to fix any glitches, Titsworth says. Although preapprovals are usually
valid for only 60 to 90 days, a lender will extend them if you update
information about your current financial condition.
And once you get mortgage
preapproval, you can confidently shop for a home.
By HAL M. BUNDRICK, CFP - To view the
original article click here