PreQualifying for a loan

Prequalifying for a Home mortgage

Before you begin your home search you should get a general idea of how much house you can afford. Lenders typically have established parameters and guidelines to follow in issuing credit. Your credit history plays an important role in evaluating your credit worthiness, but even Bill Gates (Microsoft) would be declined if he attempted to purchase more house than his income could comfortably support. Banks will only lend money to individuals who they believe can repay the debt.

It is generally a good idea to visit your own lending institution and prequalify for a loan to get an accurate accounting of how much house you can afford. This will save time by eliminating houses beyond your financial reach. Lenders want to know if you can repay the loan on a monthly basis.

A lender will begin evaluating you loan request by developing a listing of your financial assets and liabilities.

Financial assets are items that you own that have a cash value. Assets include cash-on-hand, stocks, bonds, property, automobiles, and even money owed to you by other

Liabilities include monies you owe to others and you pay on a regular basis. This may include your car payment, credit card debt, and even alimony/child support payments. Too large a liability will sabotage your request for credit

For many first time buyers, their primary financial asset will usually be their paycheck (income) and could include alimony checks, stock dividends, and other income from hobbies. You can help expedite the loan process by gathering your financial records that your lender will need to review your loan.

To get a good idea of how much you can afford in monthly payments. Look over your last 6 months history of payments to all creditors. This should include credit card payments, personal loans, car payments, student loan payments, and any other payment you make with frequency. Develop an itemized list of these payments, add them together, and subtract them from your income. Now subtract all costs associated with your new home from this number (property taxes, insurance, proposed mortgage, yearly covenant fees for you neighborhood association, etc). This number is called your proposed debt burden. We have included a handy worksheet to help you evaluate how much mortgage payment you can afford. If the total amounts to more than 36% of your income, you loan will most likely be declined.

Keep in mind, this is for your protection as well as the banks benefit. No lender likes to approve loans in which there is little hope of repayment. Also, the percent loan versus the value of the home and income plays an important rating factor. The more you have invested in the home (down payment) the more flexible the banker becomes. If you put 5% of the value of the home into the down payment, the bank may limit the maximum percent of income vs. loan payment at 15-25%. In essence, if your net pay each month is $1000, the banker may lend enough money to make a monthly payment of $250 (minus private mortgage insurance payment). On the other hand, if you were to place a down payment of 20% of the value of your home, the lender may be willing to loan a higher percentage of your monthly income.

There are two terms that you will need to understand in moving forward with a mortgage application-Income to mortgage expense ratio and debt to income ratio.

The first step you should take to begin the loan application process is to examine your net worth. This evaluation of assets and liabilities goes a long way in determining how much of a down payment you can afford. Once you perform this assessment you will be able to establish your liquid assets and illiquid assets. Liquid assets are generally considered cash-on-hand or cash that is easily converted into cash. Illiquid assets may include your current home, your baseball card collection, or other assets that have value, but may require time to sell or convert into cash. Keep in mind, it may not be necessary to sell an illiquid asset to convert into cash. You may borrow against the value of these assets, which then become liquid assets.

The form below can be used to provide you with a rough idea of how much mortgage you can afford. Your lender may require a different form, but this should provide you with a head start. By performing a complete financial assessment prior to visiting your lender, you will have adequate time to thoroughly investigate your complete financial picture and this information makes the process of completing applications much easier because the information will be at your fingertips.

Figuring your net Worth
Your Assets		Your Liabilities
Cash	$ Amount	Current Bills	$ Amount
Cash on Hand		Rent
Checking Acct		Utilities
Savings accounts		Credit Card Balances
Money Market Accounts		Insurance Premiums
Life Insurance Cash-Value		Alimony/Child Support
Money owed to you		Other payments
Sellable securities		Taxes
Stocks.		Federal
Bonds		State
Government Securities		Local
Mutual Funds		Taxes on investments
Other investments		Other Taxes
Personal Property		Mortgages/Loans
Autos		Homes
Furnishings		Home Equity
Art, Collectibles		Debts to Individuals
Clothing, Furs		Auto
Jewelry		Education
Recreation Equipment		Other loans
Other Possessions
Real Estate
Homes
Other Properties
Retirement Funds		Total Liabilities	$
Vest Portion Company Plans
Vested Benefits		Your Net Worth	$
IRA/Keogh Plans
Annuities		Total Assets	$
Other Assets
Equity in Business		Minus Total Liabilities	-
Partnership Interests

Total Assets	$	Equals Your Net Worth	$

Figuring your Down Payment

The next step in

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