Before you write an offer on a home, it is best to pre-qualify for a loan. Now is the time to evaluate your lending options — not AFTER you write your purchase agreement.  Pre-qualification will let you know how much money you will be able to borrow, so that you know your price range for your home search. There is nothing more disappointing than finding your dream home and realizing, too late, that you cannot afford it.  In addition, having a pre-qualification letter also assures sellers that you are a serious potential buyer.

If you are a medical student, resident or practicing physician, be sure to visit The Mills Team’s Physician Section that contains information specific to your needs.

What you can afford will depend on your income and your debt. In general, lenders don’t want borrowers to spend more than 28 percent of their gross monthly income on a mortgage payment (your “housing expense ratio”) or more than 36 percent on all debt payments combined (your “debt-to-income ratio.”) They will define your total mortgage payment as the sum of your principal, interest, taxes, and insurance (known by the acronym PITI), and they will define your long-term debt as any monthly payments which will take ten months or more to pay off.

Low housing expense and debt-to-income ratios do not guarantee that you will qualify for a loan; neither do high ratios always signal a denial. In addition to your gross income and your current debt, potential lenders will consider these factors to determine how much you can borrow:

  • The amount of cash you have available for the down payment investment, closing costs and necessary reserves
  • Your credit history
  • The type of mortgage you are considering
  • Current interest rates
  • It is true, however, that the more you increase your other debt, the less borrowing power you have for a mortgage.

What Lenders Need to See

We said earlier that potential lenders will consider six factors to determine how much you can borrow:

  • Your gross income
  • The amount of cash you have available for the down payment investment, closing costs and necessary reserves
  • Your current debts
  • Your credit history
  • The type of mortgage you are considering
  • Current interest rates
  • To verify your income, you will need to provide your lender with
  • Recent pay stubs
  • Two years of W-2 statements
  • Two years of federal tax returns
  • To verify your available cash, your lender will want to see your two most recent bank statements for both your savings and checking accounts.

To verify your current debts and your credit history, your lender will order a copy of your credit report. Even if you don’t anticipate any problems, it’s a good idea to order a copy of your report before you begin the loan application process. This will give you time to clean up any errors or problems that may show on the report.

You can obtain a free copy of your credit report annually from one or all of the three credit reporting agencies:

Preparing to Get Your Mortgage

A little bit of financial savvy combined with a little bit of preparation can help make your financing experience a successful one. The following list will suggest some things you SHOULD do and some things that you SHOULD NOT do in anticipation of applying for financing.

The best rule to follow in today’s home loan market, DON’T DO ANYTHING (at least anything new)!!!  Except make your payments on time.


  • Make all of your existing payments on time
  • Keep originals of all paystubs, bank statements and other financial documents.


  • Don’t go to credit repair agencies
  • Don’t borrow to buy a car, furniture, or other big-ticket items
  • Don’t pay off collections or charge-offs
  • Don’t put large undocumented cash deposits in your accounts.  If your family is helping you out, get it months before, or plan to do formal gifting.
  • Don’t make any adjustments or transfers in your asset picture
  • Don’t co-sign on another person’s loan or change your name and address
  • Don’t consolidate debt to one or two cards, or close credit card accounts
  • Don’t max out or over-charge existing credit cards
  • Don’t open a new cell phone account

If your lender (the one you are actually using, not just checking out) did not instruct you to do it, you may jeopardize your chances of home ownership.

Just remember the simple tip: wait until AFTER the mortgage loan closes for any major purchases, loans, consolidations, and new accounts.  All that may EVEN be easier now that you are a respected homeowner.

Contact The Mills Team today if you have questions regarding the financing process. We are here to help!

Correcting Credit Problems

Your lender (the one you’re actually using, not just checking out) is always the final authority on what steps you should take to improve your creditworthiness.  The following paragraphs will give you an outline of what is on your credit report and suggestions that your lender might make to correct issues. However, we suggest that you do NOTHING until talking with a qualified lender. The Mills Team has a large lender referral network and would be happy to help with this important step.  See our Choosing a Lender Page for more information.

Your first credit problem may be lack of a credit history. You can approach this problem in a couple of ways. First, you can begin to build your credit by getting a credit card and charging small amounts on it. By paying it off each month, you will be establishing a positive credit history without incurring finance charges. Second, you can ask your lender to establish a nontraditional credit history which uses payment information from monthly obligations other than loans: utility bills, rent payments, telephone bills, etc.

If you have a credit history, the credit report will list all of the consumer credit that has been extended to you in the last seven years. For each account, it will show:

  • A comment about the account such as current or delinquent (and if delinquent, for how long)
  • The status of the account: positive, non-evaluated or negative
  • The date the account was opened
  • Scheduled monthly payment amounts
  • The date the last payment was made
  • The type and terms of the account
  • Your payment history over the last 12 months
  • The original loan amount, credit limit or original amount charged to loss
  • The balance owing and amount past due, if any.
  • If a payment was over 30 days late one time, it might not show on the report. If, however, payments were over 60 days late four times, over 120 days late two times, or over 180 days late one time, your credit will be seriously affected, and this will impact your ability to borrow money.

Sometimes problems will crop up on a credit report because there has been a misunderstanding or error. If you find such a problem on your report, contact the billing department for that account and have them correct it. Keep written copies of your correspondence and keep notes of phone conversations which include the names of the people with whom you have spoken, the dates of the calls and the outcome of each call. Write a letter explaining the error to the lender and attach it to the credit report. Submit copies of your written correspondence and notes from conversations with the creditor as further documentation. If a poor credit rating is the result of past problems, you need to be aware that there are no quick fixes for a poor credit history. Be patient, and improve your credit rating by:

  • Contacting each creditor and explaining your situation. Send a good faith letter demonstrating your willingness to pay off the account and include at least a partial payment, if possible.
  • If credit problems are associated with a specific incident such as a car accident, sudden illness or loss of a job, write a letter of explanation to the credit bureau explaining the circumstances.
  • If you have outstanding collections or judgments against you, take steps to pay them off. Contact the creditors and begin making regular payments, however small.
  • Always include your name, address, telephone number, and account names and numbers on any correspondence with creditors, credit bureaus and lenders. Let them know when and where you can be reached.
  • As a last resort, get professional assistance from a nonprofit credit counseling service, but be aware that they are primarily representing your creditors’ interests. They will make arrangements with your creditors to pay off a percentage of your debt, spread over a longer period of time so that your monthly payments are lower. Then they will arrange with you to pay a higher percentage of the debt, and they pocket the difference. They do nothing to resolve the bad credit history that drove you to them in the first place.
  • There is hope even if your credit rating is not what it needs to be. Remember that negative credit information is only reported in your credit file for seven years (with the exception of bankruptcy which can be reported for ten years). After that, it drops out and cannot even be considered, and you have essentially a clean slate.

Additionally, lenders are much more concerned with how you have handled your credit recently than with what happened several years ago. If you had problems in the past but have paid your bills on time since, you may qualify for a loan after as little as two or three years.

Most lenders have begun offering risk-based pricing. The rates you see advertised are frequently for super-premium credit scores, and what traditionally have been thought of as great credit scores can often have a slight rate increase over advertised rates. On the other hand, even if you have slightly damaged credit, you may still be able to get a loan; you’ll just pay more for it.

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