Pre-approval is one of the most important parts of buying a home, yet it is the last thing that people want to do. Getting pre-approved is very important for two reasons. First, it lets you know exactly what your budget it when it comes to price. Second, it shows sellers that you have the means to buy the home, and that you are a serious buyer. While it isn’t the most fun part of buying real estate, it is something you must do if you are serious about buying a home. Here is how what you need to do in order to get pre-approved.
The lender will first need to verify your income in order to determine how much money they can lend you. They do this by checking your recent pay stubs, as well as your last two years of tax returns. They do this to ensure that you have a steady and reliable source of income. If you switch jobs every six months, you are very risky to lenders.
Next, they will take a look at your credit. Your credit is a record of how well you pay your debts (or don’t pay them). FHA loans require a score of at least a 580, while conventional loans can require either 620-640. Also, the higher your credit, the better the interest rate you will get.
The lender will also take a look at what is called your debt to equity ratio. Your debt to equity ratio is the total of your monthly debt divided by your gross monthly income. Lenders do not want your debt to equity ratio being any higher than 43%. If you have a ratio that is higher than 43%, you are too risky for lenders to consider. You can lower your debt to ratio by paying off some of your debt, such as credit cards or any personal loans. Lowering your monthly debt by even just $100 per month can make a big difference in your debt to equity ratio!
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