The first step in the mortgage process is pre qualifying, which will determine how much a lender will lend you.
Most lenders use national guidelines to determine the maximum amount that they will lend. Within the context of these standards, some lenders choose to be lenient and flexible, while others are strict. To pre qualify you, lenders look at the following information:
- Employment History
- Credit History and Scores
- Monthly Income and Expense
The size of the mortgage that can be afforded monthly, can estimated through two essential ratios: housing ratio and debt ratio.
Housing ratio is determined by your total monthly mortgage payment divided by your total monthly income.
Debt ratio is determined by the sum of your total monthly mortgage payment and other fixed monthly debt payments divided by your total monthly income. If these ratios are too high, lenders may decide to deny the application.
If you do not automatically pre qualify, you will be given advice on what you can do to get qualified for the amount you are looking to borrow (increase your credit score, apply for special loan programs, etc.).