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Loan prequalification vs. preapproval One of the best ways to determine your budget is to have your real estate agent or lender prequalify you for a loan. Prequalification is different from preapproval, because it is only an estimate of what you'll be able to afford. On the other hand, preapproval is a more formal process where a lender examines your finances and agrees in advance to loan you money up to a specified amount. What factors are important to lenders? Banks and lending institutions will use several criteria to determine
how much money they'll agree to lend. These include: Two important ratios Lenders also use your financial information to figure out two, very important ratios: the debt-to-income ratio and the housing expense ratio.Debt-to-income ratio Many lenders use a rule of thumb that the amount of debt you are paying on each month (car payment, student loan, credit card, etc,) shouldn't exceed more than 36 percent of your gross monthly income. FHA loans are slightly more lenient.Housing expense ratio It is generally difficult to obtain a loan if the mortgage payment will be more than 28 to 33 percent of your gross monthly income.Down payments make a difference If you can make a large down payment, lenders may be more lenient with their qualifying ratios. For example, a person with a 20 percent down payment may be qualified with the 33 percent housing expense ratio, while someone with a 5 percent down payment is held to the stricter 28 percent ratio. |
