We have all heard the famous question – which came first, the chicken or the egg? In the mortgage business we have a similar philosophical question – which comes first, get pre-approved for a home before you find a property or after?
There are three areas that are reviewed in terms of determining if a homebuyer qualifies for a home purchase. The lender will gather the following information and corresponding documentation, if necessary.
Area One is the buyer’s credit score. Each person has developed a credit score based on their own spending and loan history. The credit score is a composite of three credit bureaus and the higher the score, the better. In addition, the lender will also consider all of the borrower’s outstanding liabilities. It is clear that if a borrower has a lot of debt, it may be difficult to qualify for the loan amount they are looking for.
Area Two is the buyer’s income. There are two components to this area. Firstly, lenders will want to establish a two year history of employment for the borrower. Secondly, the actual income and consistency of earnings is a crucial component.
Area Three is the assets that a borrower has available that can be utilized for the purchase. There are many costs associated with purchasing a home and the first of which will be the down payment and loan closing costs. These funds can be from “liquid assets” which include checking and savings accounts and mutual funds. At times, it is also beneficial to show additional reserves, which can be in form of “non-liquid assets”, such as retirement funds and stocks.
Now here is where our opening question can be answered: If you have found a home already, you will contact your lender to determine if the above three areas correspond to the loan amount needed to purchase the home. Or, if you have recently begun your home search and would like to know what would be the maximum purchase price you can afford, you would work with a lender at this point. The lender will determine what you can actually qualify for based on the above areas.