How to Pre qualify Yourself for a Mortgage Loan

By John Casteele

Purchasing a home is a major investment. In many cases, a mortgage loan is needed to complete the purchase, with the buyer repaying the loan over the course of 10 to 20 years or longer. Before applying for a mortgage, it is a good idea to pre-qualify yourself for the loan. This will ensure that you meet the lender's minimum qualifications and will save you time getting a quote or completing your loan paperwork.

Estimate your credit score. Though the credit score requirements for a mortgage will vary from one lender to the next, you will be much more likely to qualify for a good interest rate on mortgage loan if your credit score is at least 680.

Calculate your average monthly income. This should be your gross income before taxes or other expenses are taken out. Consult your pay stubs or ask your employer for assistance if you do not have a record of your gross income.

Calculate your front-end ratio, a comparison of the monthly mortgage payment you would like to make and your monthly gross income. Divide your income by the maximum amount you would like to pay each month on your mortgage payment, then multiply the result by 100. The total is the percentage of your monthly income that your mortgage payment would require. Ideally, this should be lower than 28 percent.

Calculate your back-end ratio, a comparison of your monthly debt and your monthly gross income. Add all of your monthly bills and expenses, then divide this amount by your monthly income and multiply the result by 100. This percentage should ideally be lower than 36 percent.

Determine how much of a down payment you can afford to make on a property. The higher your down payment is, the less you will need to borrow and the lower your loan-to-value ratio will be. The loan-to-value ratio of a mortgage compares the amount that you borrow to the total value of the property being purchased. The lower your loan-to-value ratio is, the more likely you are to get a favorable mortgage loan.

Contact potential lenders and inform them that you are interested in pre-qualifying for a mortgage loan. Supply the lenders with the information used in your calculations, such as your estimated credit score, desired monthly payment, monthly debt, gross income and potential down payment amount. Lenders may perform their own calculations for pre-qualification based on internal rules for mortgage loans and will inform you of your pre-qualification status after these calculations have been made.

If your credit score is low or your front-end or back-end ratios are higher than the recommended percentages, you may benefit from delaying your home purchase and spending the time necessary to improve your credit or reduce your monthly expenses. Having good credit and low ratios makes pre-qualifying for a loan easier.

Keep in mind that pre-qualifying for a mortgage is not the same as being pre-approved for a mortgage. Pre-qualification determines whether you can afford the loan and its payments based on estimates while pre-approval verfies your financial information and credit for the lender.

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