Mortgage Pre-Qualification (Guest Post)

The following article is a guest post from Shawn:

It is critical that you have an idea about how much house you can afford before you start searching for one. If you and your real estate agent go and start looking at every home that you find appealing, it would be a waste of sheer time. There is obviously a maximum cap on the amount which you can afford to spend on a home and the amount a bank will be willing to lend you to purchase a home.  Completing a pre-qualification for your home mortgage will save you a lot of time in the long run.

It is important that you get a basic idea of how much you can afford before you go and see a lender. As a general rule of thumb, you can afford a home that is valued at twice your annual income. It’s important to note that this general guideline usually doesn’t translate well to San Francisco and our real estate prices. Another factor that you will want to take into consideration is the loan term you are opting for. Monthly mortgage payments for the same amount of home mortgage will be different for a 15 year loan term and 30 year loan term.

Mortgage pre-qualification is esentially the process of estimating the highest amount that a bank would give you for a mortgage.  The amount that you qualify for is based on your income level, debt level and credit scores. You can then begin to search for a home in the price range of the pre-qualified amount. However, you should keep in mind that a mortgage pre-qualification is in no way the guarantee for a loan. You may not receive final approval for the full amount of the loan if your financial situation or has changed or the lender discovers additional facts about your financial situation that you failed to provide.

There are certain general criteria that you should be aware of  when you pre-qualify for a mortgage. A few items that lenders consider include:

1. Housing expense ratio — This is the ratio between your principal, interest, taxes and insurance to your monthly gross income.
2. Debt to income ratio — This is the total amount of debt payments you have to make to your monthly gross income.
3. Credit score — The best interest rates are for borrowers with scores above 750.
4. Financial condition — Your income level and job stability is a major factor.
5. Down payment — The more down payment you can make the better.