The Home Buying Process
Author: Pam Mason
*The first in a series of articles that describe the process of buying a home.
Once you decide to buy a home, there are several initial steps to be taken. But, the absolute first thing that should be done is to determine your buying power. How much house can I afford? How much down payment do I have to make? How much will my monthly payment be? Buying power simply stated is a combination of the money you have saved plus the amount that you can borrow.
Many sellers ask a potential buyer to provide either a pre-qualification letter or an actual qualification letter along with an offer to purchase property.
A pre-qualification letter is an indication that based upon the front end qualifying ratio the lender should be able to approve a loan for you. The front end qualifying ratio is calculated by dividing the expected monthly payment (including principal, interest, taxes and insurance) by your gross monthly income. The acceptable ratio is based upon the guidelines of the loan program. As you can see, the pre-qual letter doesn't necessarily take your credit history or your other debts into consideration. So, it does not assure you that you will be approved for the loan. It is just the first look.
On the other hand, a qualification letter is based upon the back end qualifying ratio which is calculated by dividing the expected monthly payment (including principal, interest, taxes and insurance) plus any other monthly bills by your gross monthly income. This is often referred to as your debt to income? ratio. An acceptable credit score (or Beacon score) is necessary at this point. Different loan programs have different guidelines as to what is acceptable.
So, by providing some basic information about your available savings, income and current debt, a lender can provide you information about the various financing options that are available to meet your needs. They can also answer your questions as to how much your payments will be, how much down payment do you need to pay, and can also give you an estimate as to your closing costs.
