A three-legged stool is a simple piece of furniture: it needs 3 legs for it to be stable. If one leg is missing, it doesn’t work well as a stool anymore.
Three-legged stools have been used often to describe situations where three parts make a successful whole.
When getting ready to pre-qualify for a mortgage loan, there are three important ‘legs’ of your finances that must be in place.
The first one is your income.
1. Monthly Income
Your monthly income is how much money you make per month from your employment.
Your income is something you can’t easily increase, and, when applying for a loan, you have to be careful not to decrease it.
When you are getting pre-qualified (and through the entire loan process) you must be careful of not switching jobs, of becoming self-employed, or of reducing your work hours. Any of these changes will raise a red flag with the lender and could reduce your options for getting the best loan possible.
Once you have the income leg figured out, next comes your debt leg.
2. Monthly Debt
Your Monthly Debt is how much money you pay every month toward the loans and credit cards you have. For example: car loans, student loans, credit card payments, etc.
Your total monthly debt affects the amount that you can get pre-qualified for a loan. When you don’t have any other debt, you can use all your borrowing power toward buying a home.
But wait – you must not rush to pay your existing debt off or you might sacrifice the amount of cash you have available. And cash is the third leg.
When you are applying for a loan, depending on the loan programs available, you will need a minimum of 3.5% of the price of the property to apply toward the down payment. Plus, you’ll need to have additional cash to pay for the closing costs which could be another 1%-3% of the price of the property.
The best thing to do is to save enough money for the down payment and closing costs, and keep it in the same account for at least 90 days. Lenders like to see that the money is yours and that it isn’t going to disappear prior to getting your loan.
Once you have your income, debt, and cash situation assessed, it’s a good time to contact a couple of your trusted lenders to pre-qualify for a mortgage loan. You can also ask them for tips to improve your chances to get the best loan program possible. These tips will also help you have a smooth loan process.
As you see, getting your three-legged stool ready to pre-qualify for a mortgage loan is easy
- Keep your source of income stable
- The less debt you have, the better – but don’t go paying off debt at the expense of your needed cash
- Make sure you have saved enough cash to cover the down payment and the closing costs
If you are ready to pre-qualify for a mortgage loan, learn how to avoid the 3 most common mistakes when choosing a mortgage lender