A Guide to Pre Qualify Yourself

If you are just starting out on your home buying journey, one of the first questions you should get answered is, Am I even qualified? Well, many people want to do some research and evaluate before actually submitting an application, here are the things you should evaluate.

You can get a solid first read on what you qualify for by looking at three things yourself: income, assets and credit. Start from your gross monthly income, subtract your monthly debts, and work backward to a house payment you can afford. Then go through the questions below. If every answer is simple, you’ll probably have a simple loan. If any of them gives you pause, that’s the part to talk through with a loan officer before you start making offers.

A self-check is not a pre-approval. It tells you how ready you are and what to bring up when you have the real conversation.

Why this matters

We’ve recently seen several buyers go under contract on a “pre-approval” that turned out to be a letter with a rate on it and nothing more. Nobody had looked closely at how they earn their money, and they never saw a fee sheet. When the real numbers showed up, so did the surprises. Most of those surprises could have been caught with one conversation at the start.

Step 1: Run the basic math

Qualifying works backward from your income. Lenders use your pre-tax (gross) income and, on many loans, allow up to about half of it to go toward all of your monthly debts combined, including the new house payment. The exact limit depends on the loan program and the rest of your file.

Example	Monthly
Salary of $60,000 a year	$5,000
Half of income available for all debts	$2,500
Minus a car payment ($400) Minus a credit card payment ($50) Minus student loans ($50)	−$500
Room for the total house payment	$2,000

That $2,000 has to cover principal and interest, property taxes, homeowners insurance and any HOA dues. In Texas, taxes and insurance can be a large share of it.

Once you know the payment, add in how much you have for a down payment and you can work out a price range. Any online mortgage calculator will do this part. If you already have a budget you’re comfortable with, use the lower of the two numbers.

If you’re on a fixed salary, have been at your job for years, have savings that just sit in the bank without big deposits coming and going, and have good credit, this math is most of the story. For everyone else, keep going.

Step 2: Ask yourself how you really earn your money

“I make $10,000 a month” isn’t always what an underwriter will count. The rule that comes up most often is two years: lenders want to see a two-year history for most kinds of income.

Do you own a business or work for yourself?

• How long have you owned it? You don’t need to have owned it for two full years, but you do need two years in the same line of work. If you worked in that field, or even for that same company, before buying it, that counts.
• Do you have at least one full calendar year of tax returns for the business? Income is calculated from complete January-through-December years. If you’ve owned the business for a year and a half but have only filed a half-year return, you may need to wait for the next full year.

Is part of your pay commission, bonus or a stipend?

• Commission and bonuses generally need a two-year history so they can be averaged. If $2,000 of your $10,000 a month is commission you’ve only earned for eight months since moving into sales, that $2,000 likely won’t count yet.
• Bonus timing can hide income. A year-end bonus might not show up on your pay stubs until December, or it might be paid in a later quarter. We’ve had a borrower whose annual bonus landed on the last paycheck of March the following year. It still counted, but it took documentation and a written verification of employment to prove it.
• Stipends and allowances may or may not count depending on how they’re paid and whether they’re guaranteed to continue.

Do you work more than one job?

A second job generally needs a two-year history too, or it doesn’t count. It helps a lot if your primary job has stayed the same for those two years.

Unusual doesn’t mean impossible. We once closed a loan for a buyer who worked events: private parties, Astros games, Rockets games, all paid by different companies. She had around six W-2s a year, $20,000 from one and $12,000 from another. It was a lot of paperwork, but it showed she had earned her living that way for more than two years, and the income added up.

Do you pay or receive child support or alimony?

If you pay it, it counts as a monthly debt. If you receive it, it may count as income. Either way there are specific steps to document it, so bring it up early. There are also rules for using those based on how long you have received them and/or how long you will be receiving them. Example, child support must be received for three years after closing, so if you receive child support but the child is a senior in high school, that income will be ending in less than 3 years so we can’t use that as an income source.

Step 3: Check where your down payment is coming from

Your down payment and closing costs have to come from your own funds or from a gift. Two things trip buyers up here.

• Large deposits have to be sourced. Any large deposit that shows up in your bank account needs a paper trail showing where it came from. Moving money around right before you apply usually creates more paperwork, not less.
• Gifts should go directly to the title company. If a parent or grandparent is helping, have them send the money straight to title rather than to you. They’ll still sign a gift letter either way. But if the money passes through your account first, it becomes a large deposit, and we’ll need to see the bank statement it came from. Most family members would rather not send their statements to the mortgage company.

Step 4: Know your credit before a lender pulls it

Check your credit through Experian or the credit monitoring your bank or card provides. Do not use Credit Karma, their numbers often don’t match what a mortgage lender will see. The goal is no surprises.

You may have heard there’s no longer a minimum credit score for some loans. The automated underwriting systems still look at what’s in your report. A score under roughly 620 to 640 usually reflects late payments, collections or high balances, and those can keep you from an automated approval even without a hard cutoff.

Step 5: Decide whether you need a conversation (you probably do)

The rule of thumb;

If your income is anything other than a fixed salary, you need a real conversation with a loan officer, not just an online application.

Nine times out of ten a file is simple. In the other one, there’s usually nothing wrong. Something is just out of the ordinary, and someone has to explain it to the underwriter before the underwriter finds it. High-volume and online lenders generally don’t have that conversation.

When a referral comes in, we start by scheduling a call. Some people call it a mortgage strategy session; we just call it a conversation. We ask how you got into your line of work, how you’re paid and what your timeline looks like. Most of the loan application gets answered along the way, and so do the questions we know underwriting will ask.

We go into it looking for every reason you could be declined. If we can’t find one, the underwriter most likely won’t either. Think of us as your lawyer and the lender as the judge: we’re presenting your case, so we need to know everything up front. If you don’t tell us, the lender usually finds out eventually.

What a real pre-approval includes

• A conversation about how you earn your money, your assets and your timeline
• Review of your actual documents: pay stubs, W-2s or tax returns, and bank statements
• A credit report pulled by the lender
• A fee sheet showing estimated closing costs and cash to close, not just a letter with a rate on it

If your pre-approval didn’t include all four, ask for them before you make an offer.

Fee Sheet or Loan Estimate

We are highlighting this because it is a requirement. Unfortunately since rates rose in 2022, most lenders just send an approval letter with a rate on it because loan officers are too scared to show what they are charging, often leading to a surprise when you get under contract.

Before you make an offer, request a full fee sheet. If they don’t send you an estimate with all fees, taxes, and insurance itemized out with a total cash to close at the bottom you need to get a second approval done. And unfortunately we see this with both direct lenders and brokers.

Common questions

How much house can I afford on my salary?

Start with half of your gross monthly income, minus your other debts. On a $60,000 salary with a $500 car payment, that leaves about $2,000 a month for the full house payment, including taxes, insurance and HOA dues. The exact limit depends on the loan program, your credit and your down payment.

Can I get a mortgage if I’ve been self-employed for less than two years?

Often, yes, if you worked in the same field before. Lenders generally want two years in the same line of work, not necessarily two years of owning the business. You’ll usually need at least one full calendar year of business tax returns so income can be calculated.

How should family gift money for a down payment be sent?

Directly to the title company. The person giving the gift still signs a gift letter. Sending the funds straight to title keeps a large deposit out of your bank account, so the lender usually doesn’t need to review the giver’s bank statements.