Receive Pre-Approval from Lender (valid for 90 days)

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Date
January 25, 2013
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Your Financial Story: Meeting With a Lender

Before looking at properties, you will want to meet with a lender.  The purpose of this meeting is to determine what type of loan and how large of a loan you qualify for.  If you have not yet met with a lender, check out our Directory of Resources for trusted mortgage lenders.  You will want to make sure that you receive a Pre Approval from your lender, as opposed to a Pre Qualification, as your real estate agent will require you to have a Pre Approval before working with you.  The Lender is interested in making sure both you and the property are in good stable condition.  To evaluate the risk associated with making the loan, they will check the 4 C’s:

Capital

This is the money you have available to make your down payment, pay for closing costs, and keep in reserves.  The lender wants to see that you have sufficient funds to not only purchase your home, but that you can deal with the unexpected costs that come with being a homeowner to take care of your investment.

Capacity

The lender wants to be certain that you have enough income and low enough debt to be able to pay your mortgage as well as your other bills every month.  They determine this by using qualifying ratios.  Qualifying ratios are expressed as a front and back ratio (ex: 33/38) and they are a comparison of your gross monthly income to your monthly debt.  The front ratio determines your maximum allowable mortgage payment, or PITI.  In the example we used, your mortgage payment cannot exceed 33% of your gross monthly income.  In addition, your mortgage payment plus all of your other monthly debt that you already carry cannot exceed 38% of your gross monthly income in order to qualify for the loan.  As of January 10, 2014, the CFPB has set new rules for qualifying ratios that determine how much of your gross income can go towards your housing payment and how much can go towards your total debt.  The ratios for each mortgage product will vary, but they must abide by the established limits.  Your lender will also want to see that you have at least 2 years of consistent work history.

Credit

Your lender will want to know how well you pay off your debts according to the agreed upon terms.  They will pull your credit report from all three bureaus, Experian, Equifax, and Transunion, to make this assessment.  Each bureau will provide a score and they are usually different.  Every mortgage product will have different rules about what score will be allowed.  The lender will use the middle score from the three bureaus to determine your eligibility.  If you are buying with another person, the lender will use the lower of the two middle scores.  Typically they want to see at least three trade lines on your credit report – this can be a credit card, store card, car loan, school loan, or personal loan.  Missed payments, late payments, and unpaid debts can be problematic.  Be sure to see your report before you look to buy a home.  As a Massachusetts resident you can get a free report from each bureau once a year at www.annualcreditreport.com.

Collateral

The home you are buying is the collateral.  This is the security for the lender should you stop paying your mortgage.  The bank wants to be sure that the home is in good shape and that it has sufficient value.  They don’t want you to buy a home that needs so much work that you could have difficulty paying the mortgage after investing too much in repairs.  And if they are forced to foreclose they want to be sure they can sell the home to cover the cost of the loan.