c



 


  


 c



In our present series on home buying, we have discussed developing a budget to determine

whether you can afford home ownership, what documentation you will be expected to present,

and choosing a lender. Once you have decided which lender to use, the next step would be to

obtain a pre-qualification or pre-approval from that lender.

A pre-qualification is when the Loan Officer asks you some questions about your income and

debts and does a quick calculation to determine who much money you can qualify for. The Loan

Officer does not verify any of your information, or check your credit. The amount he or she

gives you is just an estimate, not a guarantee, of how much the institution would be willing to

finance if all your information is accurate and your credit is verified.

A pre-approval is when you actually make application to the Lender, your credit is checked, and

the information you provide is verified and submitted to an Underwriter for a decision. This

approval is for a specific size of loan and is only guaranteed if none of the information you

submitted changes. You will not get full loan approval until you have made an offer on a

property, and that property is determined to be acceptable to the Lender.

The lender will want to know where you are employed, how long you have been employed

there, what your present gross salary is, and any other sources of income. If you are self-

employed, you will be asked to verify your profit and loss and possibly net worth. Personal tax

returns for the previous two years will likely be requested.

Once income has been established, the Lender will verify your expenses, considering revolving

debt, like credit cards; installment loans; collections and judgments; and monthly expenses

such as insurance, utilities, cable bills or doctor bills.

The lender will qualify you based on your gross income. Remember, the amount you '  ! for

is not necessarily what you can  "# in your budget. You need to carefully consider what that

amount is.

Once the Lender verifies your income, debts, and expenses they can determine how large of a

monthly mortgage payment you will qualify for. The general guideline is that you should not

pay more than one-third of your gross monthly income on your total house payment,

sometimes called your PITI or Principle, Interest, Taxes, and Insurance. This could be less if you

have major medical bills, alimony, accumulated debts, etc. On the other hand, if you have no

other obligations beyond usual monthly living expenses, the Lender may be willing to push this

amount a little higher. However, remember, it is better to opt for a smaller payment you know

you can handle rather than one that will put you on the edge of your capacity. You never know
when a downturn in the economy, a lost job, or a major illness may stress your ability to meet

the payment.

Premiums on two types of insurance will be added to your monthly principal and interest

payment. The first is homeowner͛s insurance or hazard insurance. This insurance covers your

home for fire, theft, vandalism, wind, hail, etc. This insurance will help you pay for repairs if the

house is damaged. It also covers claims for damages by those injured on the property. This

insurance is required by the Lender to protect their interest in the property, in case you would

default and they would need to repossess it. Be sure you choose a company large and solvent

enough to cover a large loss, such as from a tornado.

The second type of insurance you may be required to carry is called Mortgage Insurance. This

insurance policy guarantees that the Lender will receive their payment if you default on the

loan. If you cannot provide at least 20% of the property cost as a down payment, you will be

required to purchase mortgage insurance. The fee can be financed into your loan, if you cannot

afford it outright. This will add to the size of your loan and the total interest you pay over the

life of the loan. Once your equity in the property rises above 20%, you should be able to drop

the mortgage insurance and be relieved of the premium.

Bill Taylor
Weston County Extension Office

p