Some Other Relevant Documents
As hinted above, several proofs and documents would be taken to issue a pre-approval letter. Employment verification, drivers license, social security number, credit score, and tax return would also be required for the purpose.
In brief, to improve the chances of being chosen by a seller a pre-approval letter for a mortgage is necessary. To get the pre-approval, the borrower must have pre-qualification, proof of income, proof of asset, and some other important documents.
What Should I Input For The Credit Card & Loc Balances Section Of The Mortgage Pre
For this section of the calculator add up all outstanding balances that you keep on your credit cards or lines of credit each month.
If you use your credit cards and pay them off to zero each month, then type in “0”. If you pay off your credit cards but keep a balance on your line of credit of $5,000 then add “5000” to this section.
The calculator will determine the minimum payment that you are required to make based on the balance that you input. The qualifying mortgage amount is then calculated based on all the input including your credit card and line of credit debt.
You will noticed that you can have a credit card balance without any effect on the approved mortgage amount. Once you increase the balance over a certain number, then qualifying mortgage amount decreases.
Play around with the numbers, it’s fun to see how different revolving balances will change the results.
Get Preapproved As Early As Possible
If you are starting your homebuying process, a mortgage preapproval letter says how much that lender is willing to lend to you. In other words, you will know how much house you can afford, making your house hunting process easier for you and your real estate agent.
Bear in mind that the letter may have an expiration date .
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How To Improve Your Credit Rating
- Having a balance too close to your limit can decrease your credit score. Keeping your overall usage low by paying down your balance even if its only the minimum amount.
- Carrying high credit card balances can decrease your credit score. Keeping your balances low by paying down or consolidating your credit cards will improve your credit score.
- Making at least the minimum payment on time is important to maintain or improve your credit score. It’s a good idea to set up automatic payments to make sure you are never late.
- Maintain a mix of credit, such as a credit cards, an auto loan, and a line of credit. Responsible use of credit cards and loans will produce a better credit rating than no history at all.
How Does The Calculator Work
The calculator determines what amount you can qualify for by analyzing yourdebt-to-income ratio. The DTI ratio is a financial metric used by lenders to assess the ability of the borrower to manage their debt. It is calculated by dividing your monthly debt expenses by your gross monthly income. For example, if your monthly debt is $1,500 and your gross monthly income is $4,500, then your DTI ratio is 33% .
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Let’s Start With The Basics
Gross annual household income is the total income, before deductions, for all people who live at the same address and are co-borrowers on a mortgage. Enter an income between $1,000 and $1,500,000.
A down payment is the amount of money, including deposit, you put towards the purchase price of a property.
Minimum down payment amounts:
- For homes that cost up to $500,000, the minimum down payment is 5%
- For homes that cost between $500,000 and $1,000,000, the minimum down payment is 5% of the first $500,000 plus 10% of the remaining balance
- For homes that cost over $1,000,000, the minimum down payment is 20% or more depending on property location
For down payments of less than 20%, home buyers are required to purchase mortgage default insurance.
A down payment is the amount of money, including deposit, you put towards the purchase price of a property.
Minimum down payment amounts:
- For homes that cost up to $500,000, the minimum down payment is 5%
- For homes that cost between $500,000 and $1,000,000, the minimum down payment is 5% of the first $500,000 plus 10% of the remaining balance
- For homes that cost over $1,000,000, the minimum down payment is 20% or more depending on property location
For down payments of less than 20%, home buyers are required to purchase mortgage default insurance.
Selecting your province or territory helps us personalize your mortgage results.
Enter your total monthly payments towards any car loans, student loans or personal loans.
How To Use The Mortgage Affordability Calculator
To use our mortgage affordability calculator, simply enter you and your partnerâs income , as well as your living costs and debt payments. The calculator can estimate your living expenses if you donât know them.
With these numbers, youâll be able to calculate how much you can afford to borrow. You can change your amortization period and mortgage rate, to see how that would affect your mortgage affordability and your monthly payments.
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Your Debt And Income Help Decide How Much You May Qualify For
Lindsay VanSomeren is a credit card, banking, and credit expert whose articles provide readers with in-depth research and actionable takeaways that can help consumers make sound decisions about financial products. Her work has appeared on prominent financial sites such as Forbes Advisor and Northwestern Mutual.
Nearly 6.5 million people bought homes in 2020. One thing that almost all of them had in common: They all had a spending limit for how much they could buy.
If you’re in the market to buy a home, too, you might wonder how much you can get preapproved for, especially given how fast home prices have been rising. In general, the two biggest factors that affect how much home you can buy are your income and your debt. Here’s how lenders calculate how much to lend you.
What’s Your Maximum Preapproval Amount
Now your lender will enter all of these numbers into a calculator to figure out the biggest loan you could be approved for, given all of these factors that go into your monthly mortgage payment.
You can do the same thing yourself with this calculator. Based on the example numbers we gave throughout these steps, here’s what you would enter into the calculator:
- Monthly payment: $2,150
- Annual taxes: $2,644
- Annual insurance: $1,249
Based on the calculator output for our example, you would likely be approved for a home up to $423,495.
Even though a lender might approve you for a high mortgage amount, most experts recommend that you not buy the most expensive home your lender will allow.
This puts you more at risk of being house poor or even losing your home, especially if you find out it needs a lot of repairs or you unexpectedly lose a source of income.
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How Long Does A Mortgage Pre
Mortgage pre-approvals are valid for 90 days after you get one. If mortgage rates rise by at least one percentage point, youll need to get a new one.
When a pre-approval expires, its no longer valid as proof for purchase. You should never use an expired pre-approval to set a maximum home purchase price or to craft a household budget.
Expired pre-approvals can be renewed online or in person at any time.
Buyers with lender-assisted pre-approvals may get asked to provide additional financial documentation, including pay stubs and proof of residency.
Pre-approvals are also invalidated when a buyer changes jobs, income, or residence or experiences an atypical drop in credit score.
What Factors Are Considered For Pre
Lenders verify certain borrower information before providing a pre-approved offer. These include verification of employment, income, assets and credit score. A full credit report and credit score are pulled at the time of application vs. a limited credit report that is often used with pre-qualification offers.
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Consider Taking A Homebuyer Education Course
You should consider taking a homebuyer education course, especially if you are a first-time homebuyer. Homebuyer education courses help you determine how much you can afford to pay on a monthly basis and identify a purchase price that is affordable for you. Dont assume that the total a bank pre-approves you for is not the same as what you can personally afford to pay.
About The Author
How Far In Advance Should I Get Pre
The best time to get pre-approved for a mortgage is at least one year before you decide to purchase.
As a home buyer, pre-approvals are for your benefit, so its never too early to get one.
Getting pre-approved early is an advantage because one-third of mortgage applications contain an error. These errors can negatively affect your interest rate and ability to buy a home. Pre-approvals uncover those mistakes and give you time to fix them.
Getting pre-approved also sets your price range. Pre-approved buyers are less likely to overspend or underspend! on their residence as compared to buyers who use online mortgage calculators.
Learn more about getting pre-approved before looking for a home.
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What Interest Rate Should I Input Into The Mortgage Pre
The interest rates vary from day to day. They also vary based on the down payment you provide. Many lenders also offer different rates based on the other criteria. Therefore, we do not provide accurate current rates here.
If you want to know current rates, completed your contact details in the middle section and we can review programs, rate promotions and other options available to you.
How Do You Prequalify For A Home Loan If You Have An Existing Mortgage
If you already have a mortgage, your lender will take this into account when calculating your DTI ratio for your next home loan. Whether you plan to keep or sell that home, your lender will look to make sure you’re able to pay both mortgages. Alternatively, there are several other strategies for financing your next home while you’re working on selling your first.
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What To Do If You’re Declined For A Preapproval
There’s always a chance you won’t get preapproved for a mortgage. But don’t be disheartened. One rejection doesn’t mean you can never get a mortgage. Especially during the pandemic, some lenders have tightened their standards for credit scores, down payments and more. But that won’t last forever.
“We’ve been seeing these restrictions starting to soften as the market starts to recover and the economy becomes more accustomed to a completely virtual way of life,” Watters said.
If you do get rejected, be sure you try applying with another lender. If one lender denied you for a credit score of 690, you can probably find a lender that’s still qualifying borrowers for a conventional loan at 620 and above.
If you apply with a few lenders and still can’t get preapproved, don’t lose heart. Under the Equal Credit Opportunity Act , your lender has to tell you why your application was denied. It may have been your credit score, or it may be that you haven’t been at your current job long enough. Whatever the reason is, now you know what to work on so you can get preapproved in the future.
Improve Your Credit Score
A good first step is to look at your credit report to see where you stand. If you already have a great credit score, theres not too much you can do. But if you have a credit score that could stand some improvement, then take action.
When you improve your credit score, a lender may be willing to increase your preapproval amount. Additionally, a higher credit score may be able to lower your interest rate.
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What Is A Mortgage Preapproval
When youre shopping for a mortgage, you can compare options offered by different lenders.
Mortgage lenders have a process which may allow you to:
- know the maximum amount of a mortgage you could qualify for
- estimate your mortgage payments
- lock in an interest rate for 60 to 130 days, depending on the lender
The mortgage preapproval process may be divided in various steps. It may also be called mortgage prequalification or mortgage preauthorization. Different lenders have different definitions and criteria for each step they offer.
During this process, the lender looks at your finances to find out the maximum amount they may lend you and at what interest rate. They ask for your personal information, various documents and they likely run a credit check.
This process does not guarantee your approval for a mortgage.
Preapproval Vs Prequalification: What’s The Difference
When you start looking for a mortgage, another term you might come across is “prequalification.” Though home loan preapproval and prequalification are often used interchangeably, the process and terminology varies among lenders.
In some cases, prequalification is based on your answers to a few initial questions and a soft credit check . It usually doesn’t include details about loan amount, interest rate or terms. As such, it’s less authoritative than a preapproval — but it’s a good way to get an initial idea of whether you’re in good enough financial shape to qualify for a mortgage.
“A true preapproval will verify assets, income and the ability to repay the loan,” Watters said. “Some lenders will offer a preliminary prequalification letter, but this only shows a borrower qualifying based off of the information they submitted in their application.”
When you’re ready to make an offer on a home, you’ll want to have an official statement from a lender — or, better yet, multiple lenders — that you can get the financing and terms you need to close on the deal. Whichever term your lender uses, make sure you have it before you make an offer.
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What Happens If I Get Preapproved Then Rates Rise
Your preapproval letter will specify both how much you can borrow and the mortgage rate on which that sum is calculated. The first is contingent upon the second.
Keep in mind that you can only lock your interest rate after you have a purchase agreement in place. So you wont be able to lock in the interest rate for which youre preapproved. Its still subject to change up until the time your offer is accepted.
So if mortgage rates rise while the letter remains valid, the amount you can borrow will fall. Mortgage rates often go up and down daily or more frequently. And you cant keep updating your letter that often.
What you can do is track mortgage rates every day to see where theyre going. And use a mortgage calculator to see the likely impact of changes on your maximum purchase price.
When youre ready to make an offer, call your lender for the current amount.
If mortgage rates are rising especially sharply, you want to comparison shop, make your application, and lock your rate as soon as possible.
How Can I Increase My Mortgage Preapproval Amount
Sometimes, the amount a lender preapproves you for isnt the final word on how much you can borrow. If youre not satisfied with your mortgage preapproval amount, look at your finances for opportunities to increase your preapproval limit.
You may be able to increase your mortgage preapproval amount by reducing debt, generating more income or finding a different lender. Other common strategies to increase your preapproval amount include increasing your down payment, opting for a longer-term home loan or getting a co-signer.
Keep in mind that larger mortgages typically come with larger monthly mortgage payments. If youre financially prepared to take on more mortgage debt and larger monthly mortgage loan payments, check out our steps to optimize your mortgage preapproval application.
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What To Bring To Your In
We want you to be ready for the pre-approval process and being prepared will help. For your meeting, you should plan to bring the following:
- Current address
- Previous address
- Current employment information
- Previous employment information
- If self-employed, the last 2 years Notice of Assessments from your Income Tax return
- Value of properties, automobiles, investments, and savings
- Most recent statements for mortgages, loans and lines of credit
- Most recent credit card statements
- Estimated value of your home
- Housing expenses
- Financial information for your co-borrower, if applicable
- Social Insurance Number
What To Do If You Cant Get Preapproved
If you cant get a preapproval, try to find out from the lender why you were denied. If its an issue you can remedy, like an error on your credit report thats causing the lender to reject your application, you can address that right away and seek a preapproval again when its resolved.
If you have too low of a credit score or other financial roadblocks preventing you from being preapproved, you can work to improve those areas, too. Raise your score by making payments on time and paying down your debt load, for example, or lower your debt ratio by finding a way to increase your income. Depending on your situation, this could take time, but itll go a long way.
Some lenders have very stringent qualifying criteria, so another option is to work with a different, more flexible lender. If youre an account holder with a local bank or member of a credit union, these institutions might be more willing to work with you to get you preapproved.
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Why Calculate Mortgage Affordability
When you’re looking to buy a home, it’s handy to know how much you can afford. Being able to calculate an estimate of how much you’re able to borrow is an important part of setting your budget.
You also need to determine if you have enough cash resources to purchase a home. The cash required is derived from the down payment put towards the purchase price, as well as the closing costs that must be incurred to complete the purchase. We can help you estimate these closing costs with the first tab under the mortgage affordability calculator above.
Taken together, understanding how large a mortgage you can afford to borrow and the cash requirements involved will help you determine what kind of home you should be on the look out for. To learn more about mortgage affordability, and how our calculator works, have a read of the information below.
