Trudi Schuurhof

  • You can use our online prequalification tool to connect with a loan officer and find out approximately how much you can borrow before you start shopping for a house.
  • Once you have that number, you can provide more information and allow your loan officer to run your credit report to verify your assets and income.
  • Your loan officer can also help you obtain a complete written credit approval, subject to an appraisal, before you make an offer on a house.

Keep in mind that there’s a difference between being preapproved and prequalified.

When you’re prequalified, you’ve given your mortgage lender all the basic info they need to help you determine what loan program and what amount you may prequalify for. When you’re preapproved, your lender will have collected the necessary documents and verified your information to move the loan forward to underwriting and approval.

Prequalification can be done easily, quickly, and online. To take the next step and to get preapproved, you may be asked for:

  • Tax returns and W-2 forms from the most recent two years.
  • Bank/asset statements from the most recent two months.
  • Paystubs from the last 30 days.
  • Valid photo ID.

But remember, by furnishing any and/or all of this documentation, you are in no way obligated to accept the terms and conditions of the mortgage offered, nor do you have to provide these documents to receive a Loan Estimate (LE).

  • Don’t start shopping for a new home until you’ve been prequalified.
  • Don’t pack or ship any important documents, such as tax returns, bank statements, paystubs, and W-2s.

Prequalifying for your home loan before you begin shopping for a house can save you hours of unneeded stress and heartache. When you know how much house you can afford in advance, you can meet with your realtor, well-informed and ready to make an educated buy. In eyes of a seller, a prequalified homebuyer also appears more motivated.

Likewise, holding on to your paystubs, bank statements, and tax returns can make a speedy prequalification even speedier. To further grease the wheels and keep your loan process moving, make all your bill payments on time. It also helps to have a paper trail of any large deposits you make, as well as to notify your loan officer directly if you plan to use a down payment gift from your family.

*Avoiding these actions before and during the financing process can prevent any unnecessary confusion.

  • Don’t suddenly pay off all your debts.
  • Don’t apply for new credit cards.

Prequalification can be easy, but it’s after you get preapproved and the loan process progresses that your lender is required to pull a refreshed credit report before closing to check for any new debt. So, any major changes in your finances could delay your loan closing – or even result in a denial despite an earlier approval.

How can you keep your credit clear while your new home loan is in the works? Don’t do this:

  • Apply for a new credit card, auto loan, or other types of credit.
  • Co-sign a loan with someone.
  • Change jobs, become self-employed, or quit your job.
  • Skip payments on existing credit accounts, utility bills, or loans.
  • Charge up your existing credit on big-ticket items, like furnishings for a new house.

If you think any of these don’ts are musts, talk to your loan officer before you take action. They can help you figure out what to do so that your mortgage loan is the least negatively affected.

*Avoiding these actions before and during the financing process can prevent any unnecessary confusion.

    • Income ratio: Your total monthly housing expense divided by your pre-tax monthly income.
    • Debt ratio: Your total monthly housing expense plus any recurring debts, i.e., car payments, monthly minimum credit card payments, and other loan payments, divided by your monthly income.
    • Standard loan underwriting guidelines suggest a max 28 percent income ratio and 36 percent debt ratio, which may vary based on personal finances, loan program, and down payment.
    While not taking on any debt and paying for everything with cash seems like a logical choice if you feel you can’t afford your lifestyle, no credit also means bad credit in the eyes of a lender. There’s bound to be a time when you can’t buy something with cash, like buying a house (in most cases). So, we recommend opening at least three credit card accounts and making occasional purchases. To manage your debt and maintain healthy credit, keep credit card balances to less than 30 percent of your credit limit. Also, don’t close long-term credit lines, even if they’re not being used. Your longest-standing credit card account might be a huge contributor to your credit score health — and the mortgage rate you qualify for.
  • Cash reserves: The extra funds available to you after your loan closes.
  • These funds reflect your ability to make monthly mortgage payments, and different loan programs may have different cash reserve requirements.

To estimate your ability to pay your monthly mortgage, we recommend setting aside about 28 percent of your monthly income. This number factors into your debt-to-income ratio, mentioned above.

For many people, any number between 25 and 32 percent of your income is manageable. But, relying on a higher percentage of your monthly income could put you at risk if you have a big financial change, like rising insurance costs or loss of employment.

  • This insurance helps protect a lender if a borrower forecloses on their property.
  • Borrowers pay for the mortgage insurance, allowing lenders to grant loans they might not have otherwise.
  • Mortgage insurance may be required on some loans when a down payment is less than 20 percent.
Mortgage interest, insurance paid, and property taxes are normally tax-deductible for your principal residence. As confirmed by TurboTax, buying a house is an investment, but the tax deductions may be large enough to lower your tax bill “substantially.” Interest/insurance payments on a residential mortgage (as well as mortgage interest/insurance on a second home) may be fully deductible. Likewise, selling one home and buying another means you might be able to protect the profits on the sale of your home, as long as it was used as a principal residence for any two of the last five years. You could protect up to $500,000 in tax‐free profit when filing federal taxes jointly or $250,000 when filing single. This added bonus of tax‐sheltering the profits on the sale of your home may be available to you once every two years. Homeowners who take advantage of these deductions could save hundreds of dollars in annual taxes.
  • Also called discount points, mortgage points work as a one-time fee you can opt to pay if you’d like to get a lower interest rate.
  • One mortgage point equals one percent of your total loan amount and may drop your interest rate one-eighth to one-quarter percent lower.

You may have noticed by now that lenders charge their own fees, which can vary greatly. One lender may choose to waive a fee but add on another. Another lender might quote an interest rate before adding or subtracting discount loan points that can change the total cost of a mortgage.

    • Annual Percentage Rate: The cost of your total loan credit calculated into an annual interest rate, also called APR.
    • The APR includes loan points and other prepaid finance charges to reflect the true yield on the loan, which is why the APR is normally higher than a loan interest rate.
    • To check that you’re getting the most competitive loan, you can compare “apples to apples,” or APR to APR, on different loan programs.

    After you’ve applied for a home loan, you can expect to receive a Loan Estimate (mentioned above) from your lender. If you applied for more than one type of loan, an LE will be broken down for each loan type. The APR for a loan will be listed on page 3 of the LE, in the comparison section.

    Most of the time, you’ll notice the difference between your APR and your loan interest rate right away. An APR is often higher than an interest rate because of added fees.

    An APR is essentially a comparison tool. Interest rates, loan fees, and points may be all over the map. But, the APR can always be used to accurately compare multiple loan products. And in cases where an interest rate looks a little too attractive, the APR can tell you the real story.

    You can use this handy trick to separate the good from the bad when choosing a mortgage: Compare a loan’s APR to its advertised interest rate. An APR that’s noticeably higher than the interest rate may be a red flag that added costs are attached to the loan. Your loan officer can also help you compare and better understand loan fees.

  • Having good credit helps to get a more competitive mortgage interest rate, but perfect credit isn’t required.
  • If you have a low credit score or have filed bankruptcy in the past, you can work toward improving your credit.
Don’t let something as intimidating as a credit score keep you away from the information you’re entitled to. Checking your free credit report yearly, available from one of the three nationwide credit reporting agencies, can help you to keep tabs on your financial status — which becomes especially important when you’re buying a house. Yearly credit checks can also help you catch any problems that pop up early on, like mistakes on your credit report or instances of fraud.

Once you get your annual report back, here’s how to understand your FICO score, ranging from 300 on the low end to 850 on the high end. There are five factors that make up your credit rating:

  1. Types of credit: Taking out a variety of credit lines, like credit cards, a car loan, and other credit accounts, could increase your score. FICO score impact: 10 percent.
  2. New credit accounts: On the other hand, having a lot of credit inquiries could lower your credit score — with the exception of home and auto loan inquiries that may be lumped together as one inquiry within a 30-day period. FICO score impact: 10 percent.
  3. Length of credit history: It’s not necessarily bad to have a short credit history, if you’ve been handling your money well. And having one or two good credit accounts is better than having no credit at all. FICO score impact: 15 percent.
  4. Payment history: Delinquent and overdue bills can lower your credit score. FICO score impact: 35 percent.
  5. Outstanding balances: Keeping the amount you owe to creditors to under 30 percent of your credit limits shouldn’t affect your credit score. FICO score impact: 30 percent.
This bears repeating — your credit score matters when you’re trying to buy a house. Your credit score has a direct impact on your mortgage interest rate. A great score could qualify you for the lowest available interest rates, compared to a poor score that might make it harder to get a loan. Talking to your loan officer about how you can fix some blemishes in your credit score is well worth the time and effort to get a lower rate. Lowering even one percentage point on a mortgage could save you thousands over the long-term
    • Most loan programs are looking for a two-year job history in the same field — though changing jobs to move to a better position could be seen as favorable.
    • For recent college grads, you may still be able to get a home loan without a two-year work history.

    If you’ve recently transitioned from conventionally employed to self-employed, you may need five more documents to complete your mortgage approval:

    1. 1099 for the last two years.
    2. Form 1120S or K1.
    3. Both personal and business full tax returns for the last two years.
    4. Proof of self-employment.
    5. Current balance sheet and profit/loss statement.

    If you receive retirement or disability income, you may need five additional documents for home loan approval:

    1. Pension award letter.
    2. Social Security award letter.
    3. Supplemental Security Income (SSI) benefits.
    4. Permanent disability award letter.
    5. Recent retirement account statement.


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