Home search will get more easier and less stressful if you go through preapproval process for a home loan. This proves to the real estate agents and sellers that you are prepared for home ownership. As a result if and when you do put in a purchase offer it will be looked at seriously. These are the steps that would be completed in the process of getting a pre-approval letter from a mortgage lender.

1) Credit Score.

The loan officer will run your mortgage credit report ( this is a combined 3 beareau credit report ) that provides your credit FICO scores and the middle credit score is used ( the lower and higher scores are discarded ). The minimum credit FICO score required is between 650 – 680. Some lenders would go even lower than 650. Good interest rates are offered to applicants with FICO scores over 740. But rest assured that low FICO scores are not turned down, just that lenders will add a risk based premium to make up for lower scores.

2) Down Payment.

You will need to see how much of a down payment you have available. You can put in as little as 3.5% (of the purchase price, for a $100,000 the down payment will be $3,500.00 ) down for FHA loan, other types of loans requires a higher down payment starting at 5% and upwards. This down payment amount should be existing in your bank account (if you are going for the FHA loan then this down payment could be shown as a gift amount given to you as a down payment for this home purchase ).

3) DTI (debt to income ratio).

This ratio is the most direct indication to your lender about whether you are going to be able to afford to repay the mortgage loan. There are two components:

• a) Front end ratio – This looks at how much gross income ( before taxes ) you bring versus your proposed monthly housing expenses, including principle, interest, taxes, insurance that you would be paying provided your mortgage loan is approved. For a FHA loan the average number is around 28% with some flexibility.
• b) Back end ratio – This looks at how much gross income ( before taxes ) you bring versus your proposed monthly housing expenses, credit card (minimum monthly payments), car loan, student loan, etc. Under the new federal “qualified mortgage” QM standards that took effect in January the back end ratio is 43% with some flexibility.

4) Income.

Your loan officer will ask you for 2 months copies of your pay-stubs and 2 years tax returns. This is to verify that you have stable income for past two years.

To summarize, documentation required by your loan officer would be as follows:

• Filled out loan application
• 2 months pay stubs
• 2 months bank statements showing the down payment amount with additional reserves after the down payment amount is paid
• 2 years tax returns