Finding a new home is enough of a challenge without the added stress of qualifying for a mortgage. You have some decisions to make, including the length of the mortgage and whether your interest rate is fixed or variable. The lender considers your financial health to determine if you are likely to pay the mortgage on a regular and timely basis. If you know what lenders are looking for, you have a better chance of obtaining a mortgage for your dream home.
Debt to Income
The debt-to-income ratio is used to determine whether you have enough money each month to pay your bills. Your house payment should be no more than 28 percent of your gross income. Add up the minimum monthly payments on your credit cards, your car payment, student loans, child support, alimony, any other loan obligations and the proposed monthly mortgage payment. That total should be no more than 36 percent. If it's more than that, look at ways to decrease the debt payments by paying off a credit card or loan, or by increasing your income.
Fixed or variable, interest rates have an impact on how much your mortgage costs. The higher the rate, the higher the payment is each month. With a fixed-rate loan, the interest rate doesn't change over the life of the mortgage. Variable interest rates are tied to the prime rate. Most mortgages specify that the rate can't increase more than a certain amount within a year, no matter what happens to the prime rate. Variable rates may be recalculated every six months or annually. But the interest isn't the only cost for your mortgage. You may have to pay closing costs, which include application fees, title search, credit reports, settlement costs, underwriting fees and points. Points are a sum of money paid upfront when you close the loan in exchange for a lower mortgage interest rate.
Even after you tie the knot, your credit scores continue to be calculated separately, according to MyFico.com. However, the lower of the two scores is used to determine mortgage approval and the interest rate. Check your report for any inaccuracies well before you apply for a mortgage. You may need that time for the three bureaus to make any corrections.
While you might think that a 30-year mortgage is your only option, it's not. Mortgages are offered for 15- and 20-year time periods as well. The payments are higher with the shorter time periods, but you pay less interest overall, so the total amount you repay to the mortgage company is less.
Houses have three prices: The list price is the amount the seller is asking; the sale price is the amount the buyer and seller agree upon; and the appraised price, usually called the value or appraisal, is the house's worth as determined by a professional third-party appraiser. Mortgages are not approved for more than the appraisal. In most cases, you must also have a down payment that brings the mortgage amount to no more than 80 percent of the appraised value. However, you may be able to qualify for VA loans or other special programs that require less cash down.
The mortgage application seems to go on for pages and pages. Your income and assets are verified, and you are asked if you've declared bankruptcy within the past eight years. The mortgage application may include a statement that there are no outstanding contingencies, such as lawsuits, that could affect your income and assets. You are also asked if you plan to occupy the home. Don't misstate the answers to any questions on the application. It could be considered criminal fraud.
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