Michelle Zambrano | May 4, 2022

Obtaining a mortgage preapproval letter is the recommended first step a home buyer should take when shopping for a house. 

A lender issues a mortgage preapproval letter after having evaluated your credit report, income, and assets to ensure you meet the minimum qualifications for loan approval. 

It is during the preapproval process that a lender will also determine your maximum purchase price and loan amount; the difference usually being how much savings you have available for the down payment and closing costs. 

Sellers give more serious consideration to offers from preapproved buyers since they know you have the funding in place to make good on your offer to buy.

Investors such as Fannie Mae and FreddieMac purchase the majority of mortgages written by mortgage lenders. These same investors create the guidelines lenders use for mortgage qualification since only mortgages that meet investor standards will be purchased. 

Mortgage lenders may also add additional requirements (called overlays) to the investor’s minimum qualifying guidelines based on their own risk tolerance. Lender guidelines can change at any time due to changing economic conditions. 

Here are some general guidelines for mortgage preapproval.

There are 2 ratios your lender will use to determine your maximum loan amount. They are called Front-End DTI (Debt-to-Income) and Back-End DTI.

Your Front-End DTI is determined by dividing the proposed monthly Principal, Interest, Taxes, and Insurance (also known as PITI) payment by your monthly income. 

The Back-End DTI is determined by adding the minimum monthly payments on your credit report to your PITI. That sum is then divided by your monthly income.

Approximate DTI limits are listed below.

Down payment requirements vary by mortgage program.  

Any purchase with a down payment of less than 20% will require mortgage insurance to protect the lender from default.

Conventional loan mortgage insurance is called Private Mortgage Insurance (PMI). FHA loan insurance is called Mortgage Insurance Premium (MIP).

MIP has an upfront payment, plus an ongoing annual payment. The homeowner must refinance to remove the MIP.

PMI doesn’t have upfront costs. The annual insurance cost is removed as soon as the loan amount drops below 80% of the house’s market value.

First time home buyers may benefit from programs designed to help with the down payment and closing costs. 

You may be eligible to receive up to 10% of the purchase price in down payment assistance from the state of California.

Click below to see if you qualify for a first-time homebuyer program.