What is Pre-qualification?
Although often used interchangeably, pre-qualification and pre-approval are different terms in the home loan application process. Homebuyers must know what each of these terms means. Here at New Dwelling Mortgage, a Pre-Qualification is a complete analysis of your supporting documentation. Sellers and Real Estate Agents understand the value of a Pre-qualification from a reputable Mortgage Brokerage Company, so having one attached to your offer will give you an advantage over other offers.
The items needed to complete a Pre-qualification are Credit, Residence, Employment, Income History, and Asset Documentation. Once you are Pre-qualified, you can have peace of mind knowing exactly what you qualify for.
5 Requirements Needed for Mortgage Pre-Qualification
Below we take an in-depth look at the five things you need as a homeowner for your mortgage loan pre-qualification stage.
1. Employment and Income
During the application process with New Dwelling Mortgage, you’ll be required to provide documents that show your employment status and income. Buyers are required to provide W-2 wage statements, year-to-date income, pay stubs, and proof of any other additional source of income such as bonuses or alimony.
Mortgage lenders need to confirm that the borrowers have a stable income source. They may call your employer to verify your employment status and salary. Borrowers may also be required to provide recent copies of their federal and state tax returns.
Proof of Income and Employment:
For earners with W-2 wages: You’ll be required to provide copies of your W-2 forms and two most recent paystubs. For borrowers whose income includes bonuses, overtime, and differential pay, the most recent end-of-year pay stub is required.
For self-employed borrowers: Self-employed borrowers include independent contractors and freelancers working as sole proprietors, partnerships, etc. Borrowers are required to provide records used to report income and file taxes for the last two years, such as Form 1099s and year-to-date profit and loss statements.
Self-employed borrowers must also provide more information and paperwork about their business ventures and income. These additional requirements include the nature and location of the business, income stability, product or service demand, business’ financial strength, and proof of the business’s ability to generate income to pay the mortgage.
For real estate income earners: For home loan applicants earning from real estate, they’re required to provide documentation of their rental income, lease agreement, property address, and provide the current market valuation of the property.
2. Assets
Bank account statements: Borrowers are required to provide copies of statements from the last two months for each of the bank accounts that they’ll be using to qualify for a mortgage application. These statements are used to prove that the borrower has enough funds for the down payment, cash reserves, and closing costs.
Down payment requirements vary depending on the mortgage type. Some mortgages, such as the Veterans Affairs Loans, do not require any down payment for active duty, veterans, and non-remarried spouses.
Retirement and investment accounts: Borrowers will be required to provide statements for at least the last two months from IRAs, CDs, and brokerage accounts such as stocks and bonds. Also, homeowners need to provide the last quarterly statement from 401(k)s that show the amount of vested balance.
3. Credit History
A borrower’s pre-qualification is also based on their FICO credit score. The majority of mortgage lenders need a FICO score of at least 620 for approval. Borrowers who have strong credit scores of at least 760 enjoy the lowest interest rates.
The lower a borrower’s credit score, the higher the down payment that will be required to qualify. However, borrowers with low credit scores can work with lenders on ways through which to improve their credit scores.
4. Debt History
One of the critical factors used in determining a mortgage loan is the debt-to-income ratio (DTI). To calculate DTI, borrowers will be asked to submit:
Monthly debt payments: Mortgage lenders need to look at your payment obligations when figuring out a borrower’s debt-to-income ratio. To facilitate the calculation of the DTI, New Dwelling Mortgage will order a Credit Report to review all of your monthly liabilities.
These payments include auto loans, student loans, credit cards, and mortgages. The Credit Report will include the name and address of each creditor, the loan balance, the borrower’s account number, and the least amount of payment. For borrowers with no credit history, lenders may use records from other regular expenses such as utility bills to qualify you for a mortgage loan.
Real estate debt: For borrowers who currently have multiple mortgages, you’ll be required to provide your most recent mortgage statement indicating the loan balance, lender’s name, and address, loan number, and monthly payment. Also, the declaration page of the insurance policy and the most recent tax bill should be provided.
5. Other Documents
Lenders will also need other additional documents and records from the borrower. These documents can include the borrower’s driving license, pension award letter, social security number, and social security award letter, etc.
Borrowers might also be asked to provide the following:
Rent: For mortgage applicants who are paying rent, they are required to show proof of their payments for the last year. They should also provide their landlord’s contact information.
Divorce: Borrowers who have a court divorce decree should produce it alongside any other court orders that might be applicable, such as those for child support and alimony payments.
Bankruptcy and foreclosure: When seeking your mortgage pre-qualification, you should ask your mortgage lender what bankruptcy and foreclosure documents they’ll need during your application processing. Also, inquire about the duration you should wait after foreclosure or bankruptcy before re-entering the housing market through home loans.
Gift letters: Mortgage lenders need to verify your down payment. As a borrower, you’ll need to show the source of your down payment and how you plan to use it. Suppose your down payment funds include gifts from friends or relatives. In that case, it is crucial that you obtain letters known as gift letters from the donors to show that the money is a gift and not a loan that should be paid back.
Consulting with a mortgage broker for home loans before and during the home buying process is crucial. A consultation will save you a lot of time and heartache. Before starting the process, gather all the necessary paperwork you’ll need. Having all the ready requirements will go a long way in streamlining the application process for you as a borrower.