PRE-QUALIFICATION / PRE-APPROVAL
I often get calls from folks wanting to buy a home. I always ask if they have been to a bank to be pre-qualified. Let me explain why this MUST be your FIRST STEP in finding a home. Getting pre-qualified is very easy – and FREE! If you want to take it a step further, ask to be pre-approved – that’s when the bank runs a credit check (small fee involved – like the cost of 2 lunches?).
Getting pre-qualified – or even better, pre-approved – allows you to know exactly how much home you can truly afford to purchase. So, if the bank tells you that you’re pre-qualified at $325,000, you know exactly what homes to search.
Very often, prospective buyers tell me that they are already paying $1200 per month in rent. They use this number as what they can afford to pay toward a home loan. But, this is not how a bank calculates how loan they will give you.
Lenders use the 28/36 method for conventional loans (not the 100% financing loans). What this means is that the TOTAL of all your debt obligations for a month cannot exceed 36 percent of your income. These debt obligations will include car loan, child support, student loan, personal loans, credit card payments – anything that will show up on your credit report. (No, it does not include that loan you got from mom or dad.) ALL OF THESE DEBTS ADDED UP MUST NOT EXCEED 36 PERCENT OF YOUR INCOME.
I mentioned “28/26” – this means that your monthly home loan payment is not to exceed 28 percent of your monthly income.
The balance – 64% – is what you use for rent, utilities, private schooling, college, eating out, living expenses.