Don't just prequalify: Get approved

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Approval without pain

Cindy Waxer

Cindy Waxer writes about technology and personal finance for TIME, Computerworld, Fortune Small Business, eWeek, and CIO, as well as clients including McAfee, Microsoft, and eBay.

For those whose college years were spent gainfully unemployed, dodging bill collectors and racking up credit card debt, applying for a mortgage can feel more like a day of reckoning than a step toward adulthood. What's daunting is that qualifying for a mortgage is largely determined by an applicant's past history of paying bills on time and current level of outstanding debts. Fortunately, a slacker past doesn't have to separate you from your dream home.

"Every step counts. By all means, get a prequalifying letter, but don’t get prequalification confused with pre—approval."

For starters, qualifying for a mortgage is always relative to the property you can afford — a calculation that hinges on factors as varied as your personal financial situation, current interest rates, and available mortgage terms. For example, lenders typically want you to make all monthly payments using no more than 28 to 44 percent of your monthly income. For instance, if your monthly income is $5,000, the lender would want you to pay no more than $2,200 toward all your debts.

However, if your dream home calls for digging deeper, an excellent credit record can help. That's why it's best to have chalked up as many as possible timely payments before applying for a mortgage. Avoiding payment delinquencies will improve your credit worthiness and make it easier for you to land a loan. And if your credit risk score — a statistical summary of your credit report data — still strikes you as peculiar, don't be afraid to request a copy of your credit report so that you can search for inaccuracies. (You can get a free annual credit report from Annualcreditreport.com, a site set up by the three nationwide consumer credit reporting companies — Equifax, Experian and TransUnion — to facilitate a credit file disclosure once every 12 months.)

Even if your credit report reads like a scary Stephen King story, there’s still hope. You can increase your chances of being approved for a loan with a handsome down payment. Making a down payment of as much as 25 or 30 percent, say mortgage experts, will go a long way to helping your loan application even if you have an ugly credit history.

Once your finances are in order, it’s time to talk to the lending community. By all means, get a prequalifying letter, but don’t get prequalification confused with pre—approval. A prequalification letter is basically a letter from your loan officer saying that you would likely qualify for credit and the amount of credit you would likely qualify for. It’s a sign that you’re a serious buyer, but just an early sign. What sellers and realtors really want to see is not just that you’re qualified, but that you’re pre—approved for a specific loan amount (based on an assumed sale price). That means actually providing a suitable property to serve as the mortgage loan collateral, as well as enough personal financial information to allow the creditor to conduct a comprehensive analysis of your creditworthiness independent sources (including pay stubs, W2s, bank statements, and credit reports).

Once you're qualified and pre—approved, you're ready for the most challenging part of getting a mortgage: getting your specific loan approved — a feat that will require a lender to commit to an interest rate and you, the home buyer, to complete a loan application and pay a fee.