Pre-Qualification

Pre-Approval

Mortgage pre-approval is a formal evaluation by a lender that determines how much you can borrow based on your income, assets, credit, and debts. It involves a credit check and document review and results in a pre-approval letter that shows sellers you are a serious, qualified buyer. Pre-approval is more thorough than pre-qualification and carries more weight in competitive markets. A pre-approval letter is typically valid for 60 to 90 days.

Debt-to-Income Ratio (DTI)

Your debt-to-income ratio is the percentage of your gross monthly income that goes toward paying debts, including your mortgage, car loans, student loans, and credit card minimums. Lenders use DTI to evaluate your ability to manage monthly payments. Most mortgage programs prefer a DTI of 43 percent or lower, though some programs allow up to 50 percent with compensating factors. A lower DTI improves your chances of approval and may qualify you for better rates.

Down Payment

The down payment is the upfront cash you pay toward the purchase price of a home, with the remainder covered by your mortgage. Down payment requirements vary by loan type: conventional loans may require as little as 3 percent, FHA loans require 3.5 percent, and VA and USDA loans offer zero down payment options. Putting at least 20 percent down on a conventional loan allows you to avoid private mortgage insurance. A larger down payment also reduces your loan amount, resulting in lower monthly payments.