Mortgages are loans in which you purchase a home with money provided by a lender. In return, you agree to repay them over time with interest added on top. If you fail to do so, the lender has legal authority to take possession of your property (known as repossessing a mortgage) and sell it in order to recoup their losses.
When applying for a mortgage, several factors determine your eligibility and loan amount. Your income, debts and credit history must all be taken into account as well as what type of loan you want and how much house you can afford.
The mortgage process can be intricate and overwhelming, so it’s essential that you do your due diligence and locate a qualified lender who can assist you. A great place to start is by requesting a copy of your credit report from one or more major reporting bureaus such as Equifax, Experian and TransUnion.
If there are any red flags on your credit report, such as late payments or collection calls, it’s wise to dispute them with the bureau in order to prevent any impact on your application. Doing this may enable you to qualify for a better mortgage rate and expedite approval processes.
Your credit score: A high credit score shows you are a responsible borrower with an established history of timely payments and debt repayment. Typically, lenders require a credit score of 740 or higher in order to approve you for a mortgage loan.
Debt-to-income ratio: Lenders use your debt-to-income ratio to assess whether you can afford monthly mortgage payments. As a general guideline, aim for a debt-to-income ratio below 50%.
Employment: Your job is a fundamental element of your financial profile, so having an assured source of income is necessary. Most mortgage lenders require proof of employment for the past two years, such as a recent pay stub and W-2 tax forms. For self-employed individuals or those with multiple jobs, additional documents like a tax return and business plan may be needed to verify income.
Down Payment: When purchasing a home, you are usually required to make a down payment that must be financed with your first mortgage payment. Usually, this amount represents a percentage of the home’s price and must be paid off with subsequent mortgage payments.
Escrow Account: An escrow account is a type of bank account designed to help manage the costs associated with purchasing and owning a home. In an escrow account, money is held by the lender until you need it for things like property taxes or homeowners insurance.
A down payment is an amount of cash you must contribute toward purchasing a home before being approved for mortgage financing. Making this down payment will reduce both your monthly mortgage payment and interest payments on the loan.