Home buyers can simplify the steps of buying their dream home by prequalifying for a mortgage. So, what exactly does a prequalify mean?
Mortgage pre-qualification enables you to estimate how much you can borrow from a lender. This helps you plan for the maximum price of the home you can afford using a mortgage financed by that lender.
Clearly, for maximum value, you would want to explore multiple lenders, comparing their mortgage products and the interest rates they quote. This is where working with an online mortgage broker such as STEM Lending helps you save. You can compare multiple options with much lesser time spent as compared to shopping offline. Explore options here: https://www.stemlending.com/apply.
What are the factors influencing the prequalification amount?
Factors that influence the dollar value of pre-qualification by a lender include:
- Credit score
- Monthly disposable income
- Financial assets; and
- Overall debt at the time of application.
It is essential to build up a strong credit score and monitor your credit before applying for pre-qualification. To learn more, check out STEM Lending’s article on credit report monitoring: Proactively monitor credit report before seeking mortgage.
A key metric to understand regarding mortgage pre-qualification is your monthly Debt-to-Income ratio, often abbreviated as DTI. The debt-to-income ratio is: (Sum of all the Monthly Debt Payments) divided by (Gross Monthly Income).
This number is measure by which lenders assess your ability to repay the mortgage, since a high debt-to-income ratio can render the borrower miss a scheduled mortgage payment in the event of a large unforeseen expense, increasing the potential likelihood of default.
Common metrics that are included in monthly debt payments, thereby impacting the DTI, include:
- Monthly payment on new mortgage
- Student loan payments
- Credit card payments
- Auto loan payments
- Home appliance loan payments; and
- Other recurring debt payments present in credit report.
Lenders may set DTI thresholds for mortgage applicants and many lenders may not pre-qualify applicants with Debt-to-Income ratio greater than those thresholds. To learn more about DTI, and how it impacts your mortgage application, check out STEM Lending’s article: Explaining Debt-to-Income “DTI” and Its Importance.
Notably, other factors also indirectly impact the DTI by means of monthly mortgage (Debt) payment. These include:
- Approved mortgage interest rate
- Loan-to-value ratio (LTV)
- Credit score
- Property usage
- Late payment history and
- Any foreclosures or bankruptcies on record
Pre-qualification is not the same as Pre-approval
First-time home buyers should note that mortgage pre-qualification is not the same as pre-approval. Pre-qualification is a conditional approval of the mortgage — an estimate of how large a mortgage one can afford. However, it doesn’t create a binding commitment between the home-buyer and the lender. Pre-approval, on the other hand, involves a detailed review of applicant’s debt, income, assets and credit history and the borrower can receive a Pre-Approval Letter documenting the amount that the borrower has been approved to borrow. To learn more about differences between Pre-approval and Pre-qualification, read STEM Lending’s article: Mortgage 101: Pre-approval vs. Pre-qualification Letter.
To take the first step in getting prequalified for a mortgage and save on your mortgage, contact STEM Lending for a free initial consultation:
- Message: stemlending.com/contact-us
- E-mail: firstname.lastname@example.org
- Call: +1 (833) 600-0490 (toll free)
STEM Lending also offers simple and free mortgage calculators for you.
Wishing you a happy home buying experience!
– STEM Lending Team