How to Qualify for a Mortgage
Truth: A mortgage loan holds your property as collateral. Does that mean your lender wants to get your house? Not at all! Most lenders do not really want to end up with the houses. What they want is for you to successfully make the monthly payments so you both get what you want in the end.
It is because so many people fail to do so that when you apply for a loan you can expect from the lender to scrutinize your financial situation. Don’t feel like the lender doubts your ability to play or undermines you. He just wants to make sure that you are worth the risk. Here are some of the things that a lender needs to consider before qualifying you for a mortgage:
Generally, lenders like a down payment amount to 20% of the home’s value. But there are many types of mortgages that require less than that. Note, however, that if you put less down then you will be scrutinized by the lender even more. It’s because the less you have invested, the easier it is for you to just walk away from the loan. If you can’t put 20% down, then your lender will likely require private mortgage insurance to protect him from losses.
Loan to Value Ratio
When underwriting the loan, lenders check the Loan to Value Ratio or LTV. To come up with the LTV you should divide your loan amount by the home’s appraisal value. For instance, if the loan is $70,000 and the property you are going to buy is appraised at $100,000 then the LT is 70%. The 30 percent down payment makes it a fairly low Loan to Value Ratio. Don’t worry. Even if the LTV is 95% you are still likely to get a loan but for a higher interest rate.
There are two debt-to-income ratios that need to be considered. First, look at the front-end- ratio, also known as housing ratio – this is the anticipated monthly house payment and all the other costs of homeownership. Then you divide the amount by your gross monthly income. The result is one part of what you need. You’ll get the other half when you take all your monthly installment and revolving debt in addition to your housing expenses and divide that by your gross income, too – this is your back-end ratio. Usually, it should be no more than 28% of your gross monthly income for the front-end ratio and 36% for your back-end ratio. The guidelines may vary, though. A high-income borrower might have ratios closer to 40:50.
You can expect for the lender to run a credit report on you and this record will give you a score. The lender will most probably check three credit scoring models and use the median score for qualifying purposes. Of course, the higher the score, the higher your chance of paying off the loan. Lenders treat credit scores differently but generally, the higher the score, the better interest rate you’ll get. To know if you would qualify for a mortgage, there are many lenders who can help you out. There are also a lot of calculators avoidable online that can help you.
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