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A mortgage loan prequalification is the process of being pre-approved for a home loan prior to making the purchase. Getting a prequalification helps you understand how much house you can afford to buy and removes one of the potential barriers that may stand between you and the purchase of a home. The process of getting a mortgage loan prequalification requires you to establish a relationship with a lender, present certain financial and credit information and obtain the prequalification.
Gathering Financial Information
In order to get a mortgage loan prequalification, you should gather all of your financial information. This includes your tax returns from the past two years with recent pay stubs, a list of all your assets and liabilities, car payments, student loans and any other debts that you have. The more information that you can provide regarding your financial situation, the easier it is for the lender to make a determination on prequalification.
Measuring Your Debt-to-Income Ratio
You want to have a good idea about what your debt-to-income ratio is. The debt-to-income, or debt coverage ratio, measures how good you are at managing debt and whether or not you are too leveraged or not.
Performing a Credit Check
The lender will need your social security number and the number of any co-borrower for the loan. This information is needed in order for the lender to access your FICO report and determine how good your credit is. The FICO report is your consumer credit report that gives a good indication of your creditworthiness.
A FICO score that is around or higher than 700 (and even higher for some lenders in tight credit and lending times) tend to be better in prequalifying for a mortgage loan than lower scores.
Understand Your FICO Report
It is in your best interest to know what your FICO score is before the lender accesses the information. As a consumer, you are entitled to one free credit report per year from each of the 3 major credit reporting bureaus (Equifax, Experian and TransUnion). You should take advantage of this to ensure that the information reported is accurate and have an opportunity to either explain or address any items that may appear on the report.
Have Lender Prepare Prequalification Letter
Once you have been approved, have the lender prepare on your behalf a prequalification letter. The letter should indicate that you are an acceptable risk to the lender. This information can be provided to a real estate professional who can match you with the home of your dreams. Be aware that the prequalification is not a guarantee of a loan or a specific promise by the bank to extend financing. Its usefulness for you is that it gives an indication that you are likely to qualify once a home has been found.
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