First-Timer Primer: The Mortgage Pre-Approval Process

by UrbanTurf Staff

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It may not seem like it, but the start of spring is just a few days away, which means that the housing market will soon be in full swing. To get first-timers ready, UrbanTurf is running a series of articles every day this week to help educate buyers on the process.

From the offer to the down payment to the mortgage, we’ll touch on every facet of the home buying process and more. And if there is another topic that you want covered, just shoot us an email at .(JavaScript must be enabled to view this email address).

As first-time homebuyers get the itch to look for a home and start to venture out to open houses, it will behoove them to go through the pre-approval process. Pre-approval essentially consists of a lender going through various aspects of a homebuyer’s background (credit history, income verification, etc.) to determine how much home they can actually afford (and how much of a loan they will be able to get).

UrbanTurf reached out to Wells Fargo mortgage loan officer Matt Rexrode to help demystify the experience.

What information will a borrower need to submit for a pre-approval?

In general, a pre-approval applicant will need to submit last year’s tax return, a current pay stub, and information about any other sources of income or assets (investments, retirement accounts, for example). In addition to assets, Rexrode recommends giving lenders a good sense of all debts and monthly expenses. Lenders also like know where the down payment is coming from. “There is nothing wrong with [receiving a gift for your down payment], just be up front about that,” Rexrode said.

How important is good credit?

During the pre-approval process, the lender will also do a credit check. A “good” credit score is now considered 740 or higher, Rexrode explained. Drop into the high-600s and you may not get quite as low an interest rate as you may have wanted. Once you get below the mid-600s, it becomes more difficult to get a loan.

However, there are a number of ways to improve your score. “Something easy, like a $50 parking ticket that shows up as a collection, can be quickly paid off. A rapid re-score can then be done, so we get the improved number.”

So, how much of a loan can I expect to get?

Generally, the rule-of-thumb that lenders use these days is to assume that the mortgage payment will be 33 percent of a borrower’s gross monthly income, depending on other debts that the buyer carries. “We don’t want the total debt-to-income ratio to be more than 45 percent,” said Rexrode. (Interestingly, the old standard was 28 percent for housing, and 36 percent for total debts).

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For example, consider a $400,000 condo. Assuming a buyer will put down 20 percent ($80,000), and expects to pay $250 per month in taxes and $300 in condo fees, they will need an annual income of $73,000 to comfortably make their payments. However, said Rexrode, they won’t qualify for the same loan if they also have a $600 monthly car payment and $300 monthly student loan payment.

Any other questions about the process? Let us know in the comments.

 

See other articles related to: pre-approval, mortgage lending

This article originally published at http://dc.urbanturf.com/articles/blog/first_timer_primer_the_mortgage_pre_approval_process/6482

10 Comments

  1. Chris J. said at 4:13 pm on Monday January 7, 2013:

    Despite an average credit rating for all 3 of over 800 and a steady income($75k+ annually) the sticking point is the down payment. Not a lot of first-timers have 20% for a purchase laying around and even an FHA 3.5% can be a stretch for many.  Any suggestions?

  1. justin s said at 4:27 pm on Monday January 7, 2013:

    The FHA is probably your best bet… 3.5% might take a while to save up, but it’s not impossible. 

  1. Umekki Curry said at 5:37 pm on Monday January 7, 2013:

    There are loan programs that offer lower downpayment. I have had buyers take advantage of HPAP and NACA. BB&T Mortgage and Wells Fargo have 2% down programs but they have strict requirements. Many of the programs have income guidelines such as the HPAP and CityLift. CityLift was not a scam as I had three buyers who qualified for the program that was a 7 million dollar settlement offered by Wells Fargo.  One of the buyers was probably in line with “Logan Lady”. The unfortunate thing is that buyers had to find something quickly, get under contract and close before the 7 million dollar settlement has been dispensed. There are programs such as NACA that have no income requirements but have “time investment” requirements.

  1. James W said at 1:15 am on Wednesday January 9, 2013:

    Have you guys heard of City First Homes? They have a good program that helps with downpayment and their very good people as well. Very knowledgable about real estate and the average persons struggle for homeownership. Check them out. Cfhomes.org

  1. Adam W said at 5:19 pm on Wednesday January 9, 2013:

    BB&T has a mortgage called a CHIP loan, which allows you to put zero down or 3%, depending on income.  It’s based on the average income in your county.  I can’t remember the exact numbers (call BB&T), but a single individual in DC with an income between 85k-115k would only have to put 3% down.  If your income is below that amount, you put zero down.  There’s no PMI, which really helps out with the monthly payments, but the rate is higher than a conventional 30 year.  I did the math and, even with the higher rate, I still saved about $150 per month by not having to pay PMI.  Check it out:
    http://bbt.com/bbtdotcom/lending/mortgage/mortgage-loan-options/first-time-homebuyer-and-low-down-payment-mortgages.page#tab3.

  1. Jen Angotti said at 3:25 pm on Monday March 17, 2014:

    There’s also the DC Open Doors program that’s being offered by DC Gov.  It offers down payment assistance. 

    http://www.dchfa.org/DCHFAHome/Homebuyers/tabid/57/Default.aspx

  1. Michael said at 12:53 pm on Tuesday March 18, 2014:

    I’ve set a couple of clients up with DC Open Doors.  It’s a great alternative to plopping down a large upfront cost to buying a home.

    Also, if you find a seller who is willing to help out with closing costs, in theory you could buy a new house without spending anything (closing costs in DC are about 3.5% of the purchase price of the home).

    Granted, it’s rare in today’s seller’s market, and the caveat of DC Open Doors is that you are paying a higher interest rate (about 1% more than a conventional mortgage), but if you’re just planning on living in the home for 5 or 7 years, it’s really hard to argue.

    If you’d like more info, just shoot me an email and we can set up a chat.

  1. Roert said at 4:03 pm on Tuesday March 18, 2014:

    @Chris J-  I just reached my one year anniversary in my new home and applied for a FHA Loan.  Based on my experience, If you can’t come up with the 3.5% I would recommend either waiting until you can come up with the money or looking at a less expensive home.  I was anxious to buy and looked at programs like HPAP and revitalized neighborhoods on DCHA property. After I read the document in the sales office I noticed there are penalties if you decide to move before a 15 year period, shared equity with the District and sponsored programs when you sell and other restrictions that someone with your income level wouldn’t benefit from.  I say get a cheap apartment for a year, save as much as you can and then start looking.  Also you have a great credit score however, you still have to look at your debt to income ratio, which could also hurt your chances despite a decent score.  Hope this helps, I love my home and had an awesome buying experience once I had the money and could control the terms.

  1. MD said at 2:23 pm on Wednesday March 19, 2014:

    Most of the recommended programs have income limitations that cause me to not qualify.  Does anyone have any experience with NACA? They seem the least restrictive but the sale price cap seems low for this area.

  1. Will Smith said at 10:11 am on Thursday March 20, 2014:

    MD,

    Check out our 2010 article about NACA:

    http://dc.urbanturf.com/articles/blog/the_low_interest_rate_program_you_probably_havent_heard_about/2068

    Thanks,

    Will Smith
    Publisher

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