HAL M. BUNDRICK, CFP

A mortgage pre-qualification can be the first move

“A pre-qualification is a conversation,” says Yael Ishakis, a mortgage loan officer with First Meridian Mortgage in Brooklyn, New York. A mortgage preapproval takes a much deeper dive into your personal finances than a pre-qualification, including the pulling of a credit report. But a conversation is the first step.

Ishakis says it’s a good idea to talk to a mortgage professional and discuss your personal situation — the length of time at your job, your income and debt, and all the rest — before a credit report is reviewed. That will give you an idea of whether you should proceed with the home loan process.

“By speaking to a lender and discussing your financial situation, you can more accurately look at homes that you can actually afford,” says Ryan Gibbons, a RE/MAX agent in Oradell, New Jersey. “A buyer may think they can afford a $450,000 house based on their income, but a lender may have a different opinion based on credit scores, credit balances and income. For myself, I won’t take buyers to look at properties if they don’t at least have a pre-qualification letter from a reputable lender.”

Steps to getting a mortgage preapproval

If a pre-qualification is the initial goal, a preapproval — or conditional approval — takes you one move closer to actually buying a home. Here are the steps to getting preapproved:

• Have personal information for yourself and any co-borrower handy. That includes Social Security numbers, your current address and employment details. Two years of continuous employment is usually preferred, though there can be exceptions.
• Know your credit score and pull your own credit history before the lender does. Correct any errors and pay off any bills you can to improve your credit score.
• Calculate your debt-to-income ratio. Add up your monthly consumer debt payments, including credit cards, student loans and car loans. Don’t include expenses such as utilities and insurance. Divide that by your gross (before taxes and other deductions) monthly income. The result is your DTI ratio. For example, say all of your monthly debt totals about $1,800, including your estimated monthly mortgage payment. Your income is $5,000 a month. That makes your DTI 36%. More on this below.
• Have proof of income readily available. During a preapproval interview, you’ll likely have to offer your W-2 tax form, 1099s if you have additional income sources, and pay stubs. Self-employed applicants will probably have to provide tax returns for a couple of years.
• Have your bank, savings and investment account information handy.
• Be prepared to show where your down payment is coming from. If the down payment is from a gift or the sale of an asset, you’ll need a paper trail to prove it.
• Contact more than one lender. You may find one lender makes it easy to apply for a preapproval online, while a local lender may work with you to remove barriers to your approval. Working with more than one lender can help you find the right financial partner for your situation.