Getting Pre-Qualified for a Home Loan: 4 Things Lenders Look At!

Rick Novelo
Nov 2 · 5 min read

Hey, welcome to Doing Real Estate Smart: Real Estate Education for Common Buyers & Sellers. My name is Rick, and in this article, we’re going to be covering — Getting Pre-Qualified: What Do Lenders Look At? If you prefer the video presentation, click here.

Now, when it comes down to any real estate transaction, the first thing you’re going to need to do is get a pre-qualification. This is going to determine how much you can qualify for it comes down to purchasing a property, purchasing a home, or purchasing any type of real estate. Now lenders look at 4 things: your earnings, your credit score, your debt, and your savings.

#1 -Your Earnings

Number one, earnings. There are different types of earnings. But here, we’re going to be looking at employment and self-employment. When it comes down to employment, it’s pretty basic and simple; they look at your W2s, your taxes, and they look at least 1 or 2 months of your pay stubs. This will give them a good idea of how much you earn, and they’ll be able to decide how much you can qualify for based on that.

Now when it comes down to being self-employed or a business owner, it’s a bit tricky. They take 2 years of taxes, and they take the average of your Adjusted Gross Income. Now, your adjusted gross income, which you would probably already know is the number after all your deductions. Now, this will actually make it seem like you earn a lot less than what you really do. This is where it gets tricky because, if you’re looking to qualify for more, the lender could only determine that based on your adjusted gross income. If you have a lot of deductions, that actually decreases the number significantly, so you probably end up qualifying for a lot less than what you really be able to afford. Does that kind of makes sense? A piece of advice that I always give my clients is, if they’re looking to purchase a home in a year or so, I would suggest that for that year prior to purchasing a home to reduce the amount of deductions they make on their taxes for that year. This will then increase their buying power when it comes down to getting pre-qualified.

#2 — Your Credit Score

The second thing they look at is your credit score. Now your credit score is going to determine what type of loan program for which you be able to qualify. The most common loan programs are going to be FHA, conventional, the VA, and USDA. A 580 credit score is pretty much going to be able to qualify you for most of these programs, but this depends on the lenders as well. Every lender works a little differently. Some lenders are more conservative than other lenders. Some lenders would require you to have a 620 or so to qualify for most of these programs. Other lenders will require you to have a 640. It depends on them. But again, a 580 or so will qualify you for the FHA, for sure, conventional, most likely not. I’ve seen some lenders require a 660 in order to qualify for conventional. When it comes down to it, the higher your credit score, the easier it is for you to get the loan. Does that make sense? You always want your score to be as high as possible.

And for those of you who have low credit scores and are a little discouraged, please don’t be. There are simple things you can do that can actually increase your credit score significantly. I’ve seen credit scores increase 40, 50, 60 points in just 1 month by them doing a few things here and there. So, please don’t be discouraged. I’ll be covering an article on that as well in the future, so stay tuned, alright?

#3 — Your Debt

The third thing they look at is… your debt. For most people, this is a scary topic. Lenders look at revolving debt, any credit cards, any auto loans, any student loans or personal loans are the big ones they look at. Medical bills are not considered that as debt; they only look at revolving debt. They take the minimum payments of your credit cards and the minimum payments of your auto loans. If you’re actually paying extra in your credit cards, they don’t care about that. When it comes down to your student loans, this is the one that gets a little tricky. Even if your student loans are deferred, some lenders are still going to take 1% to even 2% of the balance of your student loans and use that against her buying power. I’ve seen other lenders that don’t do that. And if your loans are deferred, some lenders don’t use any of that against your buying power. Again, lenders, even though the government establishes a lot of these regulations, a lot of lenders work differently when it comes down to your student loans.

#4 — Your Savings

And the fourth thing they look at is savings. When it comes to purchasing real estate, you’re always going to have some amount of down payment and closing costs as well. Closing costs are going to be any fees, taxes, utilities, and a few other things; all these pretty much fall under closing costs. The down payment this is going to be determined by the program for which you qualify. Say for instance, the VA and the USDA are 0% down, so that’s great if you can actually qualify for those. But usually the conventional and FHA are going to require between 3% to 3.5% down payment. It can even go up to about 5% depending on your credit score, the lender, and some other factors.

Lenders wants to make sure that the money that you use for the down payment and for the closing costs are legal, traceable funds. It could be gifted to you, it could be coming out of your investments, it could be money you just had saved. As long as they can actually source the funds, they’re okay with that.

But overall, this is what lenders look at. Every lender is going to treat all these just a little differently because they all have their own little rules and regulations that they follow.

Conclusion

When it comes to getting pre-qualified for home loan, lenders will always look at 4 things: your earnings, your credit score, your debt, and your savings. Just remember, all lenders look at these 4 things slightly differently, so it is always great to talk to at least 2 lenders before deciding with whom to work.

This is Doing Real Estate Smart: Real Estate Education for Common Buyers & Sellers. These articles cover a lot of different topics in real estate. You can check us out at our YouTube Channel, our Facebook Page, or our Website.

Thank you. And feel free to leave any comments or questions.

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