How to Get Properly Pre-Approved & Avoid Unnecessary Disappointment
Now that youâ€™ve made the decision to purchase a home, the next step is to get pre-approved from a mortgage broker like Michigan Mortgage Solutions. We will help you determine how much you can borrow as well as the total monthly house payment you will be comfortable with.
When getting pre-approved, you will be asked to supply a good amount of documentation in order to support your income and your ability to repay. Below you will find a list of documentation that you should set aside while youâ€™re going through the mortgage process.
Some documents, like pay stubs and bank/asset statements, will need to be updated throughout the process. For this reason, we suggest you create a mortgage file, or folder, to hold your pay stubs and bank/asset statements as they come in. This way you will have everything in one place.
Mortgage Documents to Gather
- Last 30 days pay stubs for each borrower
- Last 2 years W2â€™s for each borrower
- Last 2 consecutive bank statements â€“ all pages / all accounts
- Most recent retirement or asset statements â€“ all pages / all accounts
- Copy of drivers license for each borrower
- Copy of Social Security Card for each borrower
If Youâ€™re Self Employed, 1099â€™d, Commissioned, or Rental Income
- Last 2 years of federal tax returns â€“ all schedules
- Last 2 years of corporate tax returns
If Youâ€™re Retired or on Social Security
- Pension award letter stating amount, frequency, & duration of benefit
- Social Security award letter
If Youâ€™re Divorced, Receive Alimony, Spousal Support, or Child Support
- Copy of Divorce Decree â€“ all pages
- Copy of Support Order â€“ all pages
The above documentation is most of what will be requested from you during the mortgage process. However, each borrower is unique and depending on your specific situation, more documentation may be required. In fact, be prepared to be paper-worked to deathâ€¦lol!
This process can seem quite intrusive but itâ€™s less of a hassle if youâ€™re ready for it. Plus, it is a necessary evil. If you keep all these documents in one spot from the time you start until you close your loan, your hassle will be minimal. Next, weâ€™re going to cover the math behind pre-approving you for a mortgage.
How Much Will We Lend You?
To determine your maximum loan amount, we will need to calculate your monthly gross income and compare that to your monthly debt expenses. This allows us to calculate your debt ratio.
Your monthly debt expenses include all debts that show up on your credit report like credit cards, student loans, and auto loans, plus the new mortgage payment which includes principal, interest, taxes, and insurance.
Your debt ratio is the percentage of your gross income that is spent towards debt. To calculate your debt ratio, simply divide your monthly debt total by your monthly gross income and then multiply the answer by 100.
Each mortgage program allows a maximum debt ratio they are willing to lend to and you can learn more of that by clicking on "Loan Programs" in the right hand sidebar. In many cases, borrowing the maximum amount you qualify for can set you up to struggle financially and we want to make sure you avoid that.
Even though you canâ€™t pre-approve yourself, I wanted to supply you with an understanding of the math we use to pre-approve you. Below you will see formulas for calculating gross monthly income as well as debt ratio.
Understanding Gross Income & Debt Ratio
Gross Income is the amount you are paid prior to deductions for taxes and benefits. If there is more than one borrower you would use these calculations for each borrower individually. Calculating your gross income will vary depending on your pay frequency as demonstrated below;
Gross Income Calculations
(Gross Pay on Last Pay Stub multiplied by 52 weeks) divided by 12 months
(Gross Pay on Last Pay Stub multiplied by 26 bi-weeks) divided by 12 months
Gross Pay on Last Pay Stub multiplied by 2
If you are self employed, paid on commission or you work a lot of overtime, your income calculations will be more in depth and will typically require the past two years of tax returns. If you need help with any of these calculations make sure you call Michigan Mortgage Solutions at (248) 674-6450.
Debt Ratio Calculations
TD = Total Debt
NM = New Mortgage Payment (Principal, Interest, Taxes & Insurance)
TGI = Total Gross Monthly Income
Formula - ((TD + NM) Ã· TGI) x 100 = Debt Ratio
Letâ€™s assume your total monthly debt payments are $400 and your new mortgage payment, including principal, interest, taxes, and insurance, is $1,000. Letâ€™s also assume that your total gross monthly income is $3,800.
Using the Debt Ratio Formula above we can determine the following;
TD = $400
NM = $1,000
TGI = $3,800
(($400 + $1,000) Ã· $3,800) x 100 = 36.84 %
As you can see the debt ratio in this example is approximately 37%. Most mortgage programs have a maximum debt to income ratio that they are willing to lend to and that is all covered in the "Loan Programs" section which can be accessed via the sidebar menu on the right.
Credit Reports & Credit Scores
The next part of the pre-approval process is to determine your credit scores. When applying for a mortgage, we are going to use the credit scores that are reported by TransUnion, Experian and Equifax in the form of a mortgage credit report. A mortgage credit report is not the same as the consumer credit report that you can purchase online because the scoring formulas are slightly different.
Credit scores are very important in determining your eligibility to purchase a home as well as figure out which mortgage program is best for your specific situation. In most cases, the lower your credit score, the higher your interest rate will be.
Every mortgage program allows a minimum credit score they are willing to lend to. In the "Loan Programs" section, you will learn the minimum credit score for each program.
If you have known credit issues, Iâ€™ve created a couple resources to help you improve your credit scores. Just click the link below to learn how to improve and build your credit score.
If you have no credit score at all, I've also created a resource for you. Simply click the link below and you'll learn how to build awesome credit quickly.
Make sure to contact Michigan Mortgage Solutions if you're ready to get pre-approved or if you have any questions about what we've covered so far. You can call us directly at (248) 674-6450.
Otherwise, if youâ€™d like, you can learn more about the mortgage process and other pitfalls to avoid by reviewing the content Iâ€™ve created below. I hope you find this information useful and remember you can always call us if you have any questions or if youâ€™re ready to get pre-approved and get the process started.