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Don’t Prequalify Yourself

Posted by:  Chip Poli
2012-10-10 09:52:15

If you’re considering buying a home and are wondering how much you can qualify for, there is no end to the amount of online tools and advice to help you get started.

You will research terms such as prequalification and preapproval. Credit scores and debt ratios. Collection accounts and bankruptcies. There are lots of resources for help. Sometimes though, there can be too much information. Information overload.

The internet has as one of its benefits allowing consumers to do their own homework about a product or service before finally taking the plunge. Someone can research a particular make and model of an automobile to determine its reliability and resale value. Other businesses will find consumer reviews and ratings that can help nudge a consumer’s opinion. The mortgage industry is no stranger to such advice but one thing about the mortgage industry is that while there are specific rules, there are also general guidelines.

For example, you may find a website that will tell you that a debt ratio is defined as 28/36. This is a common debt ratio for most loan programs and identifies what is called the “front” or “housing” ratio plus the “total” debt ratio. The 28 represents the percentage of the gross monthly income that may be reserved for a housing payment and the 36 is the percentage of gross monthly income for all debt combined.

Let’s say you find a website that offers to prequalify you based upon these standard debt ratios. The calculators will ask you how much money you make each month and what your minimum monthly obligations are. These are the very same questions a loan officer will ask you directly when you seek their counsel.

If you enter into the calculator your monthly income of $4,000 and 28 percent of that is devoted to a house payment, using a 3.50 percent 15 year fixed rate that would mean an approximate qualifying loan amount of $105,000. What if that amount is too low? What if you had something more like $250,000?

Do you walk away? Unfortunately, some do. Some consumers take advantage of an online prequalification calculator just to get their toes wet only to find out that home ownership is indeed out of their reach. But what if you didn’t understand the questions? What if you put in the wrong income amount or wrong amortization period? Then what would happen?

In this same example, you discovered that the $4,000 per month income was gross monthly income, not the “after tax” income that you had used to qualify yourself? Lenders prequalify borrowers based upon pre-tax income. In other words, in this example, the gross monthly income would be closer to $5,500.

Mortgage Pre-Qualification

And what if you changed the loan term from a 15 year loan to a 30 year loan, what would the result be? By extending the loan term, the monthly payments will drop. Yes, you’ll pay more in long term interest but you might still qualify for a home loan. Now let’s re-run that calculator with a $5,500 income amount and a 30 year loan at 3.75 percent. The result?

$246,000. Almost exactly at your target.

You get the message, right? There are so many variables when getting prequalified for a mortgage that simply relying on an online calculator or researching on your own can be dangerous. Use online tools only as an initial resource. Don’t prequalify yourself. Talk t a lender.

Rates. Integrity. Service.

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