As exciting as it is to be buying a new home, it can also be a stressful time. With rising interest rates and a competitive housing market, you want to be as prepared as you can be to show sellers how serious you are about buying. Taking this easy pre-qualification step with a trusted West Banker will allow you to better understand the process and your options while house hunting.

What is a pre-qualification? Pre-qualification is a term that means a bank has taken the initial step to look at your stated finances to help you determine how much you can afford when buying a home. This estimate is not what you are actually approved for, but a rough calculation to give you and your realtor a ballpark idea of what you may qualify for. You are not actually approved for that amount until the bank verifies documentation relating to your income, debt, assets, and credit.

What information is a banker typically looking at with pre-qualification? There are three major factors taken into consideration when considering a pre-qualification letter. These are DTI or debt-to-income ratio, your credit score, and loan-to-value/source of down payment.

• Debt-to-income ratio: A debt-to-income ratio (DTI) is calculated by taking into account your monthly expenses, such as student loans, car payments, phone bills, credit card bills, utilities, etc., and estimating what your mortgage payment will be.It then compares all of these expenses to your monthly income. Typically, a DTI estimate of 40% or lower is what is recommended.
• Credit Score: It is helpful for you to have an idea what your credit score is. This number can help your banker provide you with a more accurate pricing scenario. A higher credit score could lead to being offered a better rate, which will in turn save you more money over the life of the loan.
• Loan to Value and Source of Down Payment: This ratio is used by lenders to express the loan amount to the value of the asset purchased. A higher loan-to-value can negatively affect your rate and monthly payment. Conventional mortgage loan products may allow you to put as little as 5% down, but having a loan-to-value of 80% or more will require Private Mortgage Insurance which can increase monthly payments. Your source of down payment can come from funds in your checking or savings account, investments, or a gift from a close eligible family member.

After a West Banker has reviewed with you, they may be able to complete a pre-qualification letter stating you have undergone a preliminary evaluation with the bank. Now you can show realtors and sellers that you are serious about finding your dream home and have already taken initial steps with your banker.