At Flanagan State Bank Mortgage Division, our lenders often field questions from customers like What is a mortgage pre-qualification? How do I get prequalified for a mortgage? and Do I need to be prequalified to make an offer on a home?

Pre-qualifications are an integral part of the home purchasing process. They might seem confusing or complicated to first-time homebuyers. But they are usually quite necessary and are an important step in preparing to buy a home. That’s why we are dedicating this post to addressing these important questions and helping our customers navigate the often-complex path of becoming homeowners.

Curious about pre-qualifications and how you can get one? Keep reading to learn more!

What is a mortgage pre-qualification?

A mortgage prequalification is an initial step in the home-buying process. A lender provides an estimate of how much you can borrow based on information you provide about your finances, including your income, assets, and debts. This process doesn’t require a deep dive into your financial situation or a thorough credit check, which means it doesn’t affect your credit score.

Prequalification gives you an idea of your borrowing power and can help you determine your budget for buying a home. It’s important to note that prequalification is not a guarantee of approval for a mortgage. It’s an informal assessment that can be done quickly, often online or over the phone, to give you a ballpark figure of what you might be able to afford.

Documents Needed for Pre-Qualification

For mortgage prequalification, lenders typically request a few basic financial documents and information to give them an idea of your financial status. However, since prequalification is a less formal and preliminary step than preapproval, the documentation required is minimal. Here are the common types of information and documents you might need for prequalification:

• Personal Information: Basic personal information, including your full name, social security number (for a soft credit check, if performed), and contact information.
• Income Information: Details about your income sources. This could include recent pay stubs, tax returns for the past two years (especially if you’re self-employed), and information on other income sources like bonuses, alimony, or child support.
• Asset Information: Information on your assets, such as bank statements for checking and savings accounts, investment account statements, and other assets that could demonstrate your financial stability.
• Debts and Liabilities: A list of your current debts, including car loans, student loans, credit card debt, and any other liabilities. This helps the lender assess your debt-to-income ratio, an important factor in determining your borrowing capacity.
• Employment Information: Details about your employment status and history, including your current employer’s name and contact information, and possibly your job title and income details.
• Estimated Purchase Price and Down Payment: This gives you an idea of how much you’re looking to spend on a home and how much you plan to put down as a down payment. It also helps determine what loan amount you might qualify for.

Getting a Mortgage: Debt-to-Income Ratio

Once you are ready to apply for a mortgage, here are some important pieces of information to keep in mind:

You’ll need to meet certain debt-to-income requirements. Most lenders will not approve of a home loan if your mortgage payment brings your debt-to-income ratio above 45%. Calculating your DTI is fairly straightforward. Simply add up your monthly debt payments and divide them by your gross (before tax) income.

Let’s say your monthly income is $6,000, and your current monthly debt payments are $900. Your DTI would be $900 divided by $6,000, or 15%. This leaves you with a remaining 30% (or $1,800), before reaching that 45% DTI cap. Use our mortgage calculator to help calculate your potential monthly payment.

Other Loan Options

If your score is below 620 or your DTI with a mortgage payment will be above 45%, that doesn’t necessarily mean you won’t be able to qualify for a home loan. Certain loans, like FHA loans, are available to individuals with scores below 620. They may also provide more leeway on other qualifying requirements. Your lender can let you know if an FHA or other loan product is a better fit for your financial circumstances.

How to Check Your Credit Report and Score

Checking your credit report is free, and relatively easy. Simply visit the official website, www.AnnualCreditReport.com and follow the instructions. At AnnualCreditReport.com, you can obtain a free credit report from each of the three major credit reporting agencies (Equifax, Experian, and TransUnion) once a year.

Getting your official credit score, on the other hand, is not free. You can pay a nominal fee for your credit score from the above credit reporting agencies. However, some credit cards and financial services offer free credit score access to their customers. The Consumer Financial Protection Bureau details a few ways to obtain your credit score for free.

Reviewing your credit report regularly is important, both as preparation for applying for a loan and ensuring good financial health. It can help you:

• Monitor your financial progress.
• Identify any inaccuracies or potential identity fraud.
• Better understand factors influencing your credit score, so you can make strategic improvements to your financial habits.

Mistakes to Avoid Before Final Closing on a Mortgage

After applying for a mortgage, it’s important to recognize that your loan is not actually finalized until your mortgage is underwritten by your lender. That’s why you don’t want to make any sudden changes to your financial or credit situation before the closing of your loan.

Examples of mistakes to avoid include:

• Applying for a new loan or credit card
• Increasing your debt load on existing credit accounts (like spending a lot on a credit card)
• Making large purchases that reduce your savings
• Changing or leaving jobs

What to Do if You Don’t Qualify for a Mortgage?

We all hope the mortgage application process is smooth, easy, and successful. But sometimes, a pre-qualification doesn’t pan out. What do you do if this happens?

First, you’ll want to find out why you were declined. There are two main reasons why you might not get an approval:

• Your credit score is too low or there are other credit red flags
• Your DTI (debt-to-income) ratio is too high

If your credit score is impacting the decision, request a copy of the credit report the lender used, and ask your lender what you can do to improve your chances next time. This could include:

• Paying bills on time
• Paying down debts to lower your credit utilization rate
• Paying off past-due or collections accounts
• Fixing reporting errors

If your DTI is too high, then you either need to increase your income or decrease your monthly debt load. To decrease debt, you could:

• Pay down credit card debt
• Work on paying off one account or loan with a significant monthly payment
• Consolidate your debt into a lower monthly payment

Your lender may also be able to provide advice on how to best tackle your debt or achieve a more favorable DTI. Alternatively, you may be able to simply get an approval for a lower loan amount.

How Flanagan State Bank Mortgage Division Can Help

At Flanagan State Bank Mortgage Division, we work hard to give our customers the tools and the assistance they need to prepare for buying a home—from mortgage calculators and online resources to one-on-one help in navigating the mortgage pre-approval process.

Ready to get started? Explore our home mortgages to see what loans may be available to you, or reach out to your local branch in Flanagan, El Paso, Benson, Bloomington, Le Roy, Gridley, or Pontiac to connect with an experienced loan officer to discuss your options.