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While Orion continues to assist some clients with refinancing their home loans, our primary focus is guiding brokers and their new borrowers through the complex journey of purchasing a home. The mortgage amount your client qualifies for depends on various factors including their income, debts, credit history, assets, and down payment. Brokers play a crucial role in explaining these details and adding value to the process.
Before starting your home search, it’s advisable to get preapproved for a mortgage. Think of this as a trial run for the mortgage application. You’ll provide the lender with comprehensive financial information, similar to a full mortgage application. In return, the lender will issue a preapproval letter outlining an estimated loan amount and potential interest rate.
Although this letter is not a binding commitment, it serves two key purposes. First, it helps you set a realistic budget by indicating how much you might be able to borrow and at what rate. Second, when making an offer on a home, presenting a preapproval letter demonstrates to sellers that you are a serious and qualified buyer, which can give you an edge in competitive markets.
A credit score of at least 620 is generally required to qualify for a mortgage, with higher scores securing better rates. Scores of 740 or above typically qualify for the best mortgage rates. Aim to improve your credit score before beginning your homebuying journey, but if your score is lower, consider lenders who specialize in working with borrowers with less-than-perfect credit.
Obtain copies of your credit reports and dispute any inaccuracies. If you find delinquent accounts, resolve these with creditors before applying for a mortgage.
Your DTI is the percentage of your monthly income that goes toward debt payments, including credit cards, student loans, and car loans. Use tools like NerdWallet’s debt-to-income ratio calculator to estimate your DTI with your current debts and prospective mortgage payment. Lenders typically prefer a DTI of 36% or less, including your new mortgage payment, though some exceptions exist.
If your debts are too high, consider strategies such as refinancing or paying down debt before applying for a mortgage.
We want your client to have the ability to repay the loan over time, and there are metrics to determine the prospect of that. For example, the “Debt-to-Income Ratio” is simply the total debt divided by the total income, shown as a percentage. Lenders use the ratio to help determine how much mortgage one can afford. Generally, 43 percent is the highest acceptable ratio a buyer can have and still obtain a Qualified Mortgage (a category of lower risk loans), but it can go higher for non-QM loans… but your client will pay a higher interest rate.
To coach your client in computing DTI, simply add up all their monthly debts and divide by their gross monthly income. For example, if monthly payments include an auto loan of $320, student loan of $400, credit cards of $250, and a rent payment of$1,200, that adds up to $2,170 in monthly obligations. If their gross monthly income is $7,500, you'd take $2,170 / $7,500 = 0.289, or a DTI ratio of nearly 29 percent, meaning 29 percent of gross monthly income is going toward debt repayment.
You may also explain the “28/36 Rule” which combines two ratios that lenders use to determine home affordability based on income and debt. The first number sets 28 percent of gross income as the maximum total mortgage payment, including principal, interest, taxes, and insurance. The second number sets the limit on the mortgage payment plus any other debts your client owes at no more than 36 percent of gross income.
Then there's the “35/45 Rule” which recommends that your client spends no more than 35 percent of their gross income on the mortgage, and no more than 45 percent of their after-tax income to pay for all debt, including the mortgage. For example, if your client's gross monthly pay is $5,000 and their take-home income is $4,000, they should spend between $1,750 ($5,000 x .35) and $1,800 ($4,000 x .45) on debt payments.
You’ll need to provide details such as Social Security numbers, current addresses, and employment information for yourself and any co-borrowers. Bank and investment account statements, proof of income, W-2 tax forms, 1099s for additional income, and recent pay stubs are essential.
Lenders usually require two years of steady employment, though exceptions exist. Self-employed applicants will need to supply two years of income tax returns. If your down payment comes from a gift or asset sale, be prepared to provide documentation proving the source.
Applying to several lenders within a short period (typically 45 days) results in only one hard credit inquiry, minimizing impact on your credit score. This allows you to compare offers without multiple penalties.
Following these steps will help you navigate the preapproval process with confidence and position you as a strong buyer in the housing market.
Prequalification and preapproval are two important but distinct steps in the home loan journey, each serving a different purpose in the preapproval process.
Prequalification is often the initial step for prospective homebuyers who want a quick estimate of their borrowing potential. It involves providing the lender with a self-reported overview of your financial situation, including credit, income, debts, and assets. Since this information is not yet verified, prequalification is an informal assessment that gives you a general idea of how much you might be able to borrow. It’s a useful starting point if you’re unsure about your financial readiness to buy a home, allowing you to explore your options without a detailed commitment.
Preapproval, on the other hand, is a more thorough and formal step. During the preapproval process, the lender conducts a comprehensive review of your financial documents and credit report. This includes verifying your income, assets, debts, and credit history through documentation such as pay stubs, bank statements, tax returns, and authorization for a hard credit inquiry. This verification process provides the lender with confidence that you are financially capable of securing a mortgage loan up to a specific amount. As a result, you receive a mortgage preapproval letter that states the loan amount you are approved for and often includes an estimated interest rate and terms.
The distinction is crucial because a preapproval letter carries significantly more weight than a prequalification estimate. Sellers and real estate agents often require a preapproval letter before considering an offer, as it demonstrates that you are a serious buyer with verified financing. This can be a decisive advantage in a competitive housing market where multiple offers are common.
In summary, prequalification offers a preliminary look at your buying power based on self-reported information, making it a helpful first step. Preapproval involves a thorough review and verification of your financial situation, providing a stronger, more reliable indication of your ability to secure financing. For buyers ready to actively shop for a home and make competitive offers, proceeding directly to the preapproval process is often the best approach.
Mortgage preapproval is a lender’s conditional offer to loan you a specific amount under defined terms, typically valid for a set period such as 30 or 90 days. It’s essential to carefully review the expiration date on your preapproval letter and apply when you’re ready to actively search for homes and make an offer.
Keep in mind, preapproval does not guarantee final loan approval. Before closing, the home must undergo an appraisal to confirm its value matches the loan amount. Additionally, any changes in your financial situation after preapproval could affect the lender’s willingness to finalize the mortgage.
To maintain your eligibility, avoid financial actions that might raise red flags with lenders, such as applying for new credit, making large purchases, or missing payments on existing loans or credit cards during the preapproval period.
The preapproval process typically takes a few days but can vary depending on the lender and how promptly you provide the required financial documents. Supplying proof of income, assets, and other necessary information quickly will help speed up the timeline.
To complete a mortgage preapproval, you’ll need to provide several key documents. These usually include recent tax returns, W-2 forms, and pay stubs to verify your employment and income. Additionally, lenders will request details about your monthly debt obligations, such as student loans and credit card payments. Be prepared to submit bank statements, retirement account statements, and investment account documents as proof of your assets.
To get preapproved for a $1,000,000 home, lenders typically look at your debt-to-income ratio (DTI), credit score, down payment, and other financial factors. Assuming a 20% down payment ($200,000), you would need a mortgage loan of $800,000. Using the common 28/36 rule: - Your total monthly mortgage payment (principal, interest, taxes, insurance) should not exceed 28% of your gross monthly income. - Your total monthly debts, including the mortgage, should not exceed 36% of your gross monthly income. If the monthly mortgage payment on an $800,000 loan at an interest rate of about 6% is roughly $4,800 (principal and interest only), plus estimated taxes and insurance of $1,200, the total monthly housing cost would be around $6,000. To keep this payment within 28% of gross income: - $6,000 / 0.28 = approximately $21,400 gross monthly income - Annually, that’s about $256,800. So, you would generally need to make around $250,000 to $260,000 per year to comfortably get preapproved for a $1,000,000 home with a 20% down payment under typical lending guidelines. If you'd like, I can help you add a clear example like this to your article. Would you like me to do that?
Orion's brokers know that all of these methods are merely benchmarks to help your client decide how much they can afford. You'll also need to help them consider their monthly budget and other financial goals (saving for a wedding, buying a second car, putting aside money for their children's college) when determining a feasible mortgage amount. Using an experienced mortgage broker can help a borrower immensely!
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