Qualifying for a Mortgage

What You Need To Qualify For a Mortgage

Proof of Income
When an individual applies for a mortgage, they are required to provide proof of income. The information supplied has to be in a specific format because it will be included in the person’s file as an official document. For instance, the salary that the person earns on a regular basis (i.e. weekly, bi-weekly, and monthly) and any other source of income should be included in this documentation. With each mortgage lender, the standard requirements are normally the same (i.e. salary, alimony, bonuses, child support, interest income, dividends, etc.).


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Job History
Another important factor in obtaining an approval for a mortgage is job stability. Even though there is no absolute requirement for making this kind of decision, the mortgage lender is normally looking for at least 2 years at the current job position. However, for those who do change jobs but remain in the same or similar line of work, they usually do not have problem. Specifically, in cases where the individual receives an advancement or an increase in their salary.

Credit score
As it relates to most loan processes today, the credit score is also essential to the mortgage approval process. The credit score and its associated history is meant to predict how the individual will pay the loan back. It will also determine the amount of interest that the borrower will have to pay in the long run. So, it is important for applicants to consider this part of the process in advance so that they can keep their mortgage payments as low as possible.

Personal Assets
Based on the mortgage lender and the circumstances, the borrower may also be required to present specific assets (i.e. savings, stocks, bonds, automobiles etc.)

Down-payment
The mortgage lender will also expect the borrower to secure a down payment that they can provide with the loan application. The amount required is determined by the home’s value. For instance, the down-payment may range from nothing down to 20 percent of the value of the home. However, the applicant can pay more if they so desire.

What is a Down Payment for a Mortgage and why is This Important?
A down payment is an important component of a mortgage loan. What exactly is a down payment on a mortgage? It’s quite simple. A down payment is a payment made to the mortgage company upon the closing of a mortgage loan.

The down payment on a mortgage can vary from loan to loan and may be dependent on the note holder’s requirements and/or the borrower’s ability to put money down on a loan. A down payment represents a large hurdle for many borrowers but is very important when it comes to borrowing. The down payment can affect several different aspects of the loan and therefore borrowers should give careful consideration to what they can put down on a mortgage. Here are a few reasons that the down payment is so important:

The amount put down by a borrower represents their investment in the home or property. When a buyer puts more money down, he or she has a larger investment in the property and therefore may be less likely to default. Lenders recognize this and therefore can offer lower interest rates to borrowers who put more down and have more “Skin in the game.”

Borrowers may be able to avoid paying private mortgage insurance if they put more money down. This is again due to the fact that the borrower’s down payment may represent less risk on the loan. By avoiding the need to pay PMI, a borrower may potentially save hundreds of dollars or more per month.

A QUICK NOTE ON SOMETHING CALLED A LOAN TO VALUE RATIO (LTV)

The more money put down in the form of a down payment, the less the borrower will owe in total. Not only can the borrower save a great deal of money paying lower interest rates and avoiding PMI, but they will also have a smaller loan balance to begin with and thus may pay off their loan much sooner.

How to Choose the Best Mortgage Option
When you are looking for a mortgage, there are some things to keep in mind before making a final decision as well as tips on how to choose the right lender for the purpose of the mortgage.

The first thing that you need to do is examine your financial situation. Do you have the money to pay back the loan? There are various interest rates as well as repayment options, but you need to find something that will work with the budget of the household.

When you start thinking about the mortgage, you should do as much research as possible. There are lenders with higher interest rates than others simply because they know that there are some people who won’t get qualified any other way. Find out what the current rates are so that you know if the lender is trying to get more money out of you. Some newspapers have information on the current rates, or you can call a bank to find out what they are.

If you are buying a new home, then think about the amount of money that you can spend each month on a house payment and how much money you can afford to put down on the home. This shouldn’t be an amount that you desire but something realistic. If the mortgage is for improvements on the home or for another reason than to buy a home, then you need to determine the minimum amount of money that you would need. You should also think about the length of time that you plan to stay in the home.

If you only want to stay there for a short while, then a mortgage with a higher interest rate might be something to think about as they are often easier to get. You also need to look at the difference between an adjustable mortgage and a fixed rate mortgage. This often relates to the interest rates that are involved. A reputable lender can discuss your options before you make a final decision.

How Loan Payments Are Calculated (Can You Afford It)
The first way to calculate loan payments is buy using computer apps. There are many different types of loan payment calculators that are easy to follow and understand. However, some people find these loan calculators inaccurate so they use Microsoft Excel or other spreadsheet programs. Simply create your spreadsheet with headings about your rate of interest, the loan term in months, the amount of the loan, and the payments for each month. Then use the formula, PMT (B5/12,B7,B6). After you’ve completed the calculations your final answer should be the amount of your monthly loan payments.

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Many people don’t like using technology in order to calculate important number, which is why many people calculate their loan payments by hand. There are many different kinds of formulas out there that are very helpful when calculating your loan payments. However, most of these formulas are complicated for some people, which is why it is a good idea to use a simpler and basic loan payment formula.

One of the easiest loan payment calculator is M=P(J/(1-(1+J)^ -N). Just remember that M stands for the monthly payment, P represents the amount of the loan, J stands for the monthly interest, and N represents the number of months of your loan. Start in the middle of the formula with (1+J) and then work your way to the right and solve (^ -N). Lastly, after you’ve solved those two portions of the formula, work on the first part of the formula, J/(1-). After you’ve gotten your semi-final answer from these three portions of the formula, multiply it by the amount of your loan and you will have your final answer, the monthly payment.

Overall, there are many different ways to calculate your loan payments, but most of these ways are known to be difficult and tedious. Fortunately, the ones above are easy and effective ways to understand and procure your monthly loan payments.

NOTE: Is A Sub Prime Mortgage Right For You? – Find out More

What is Debt to Income Ratio and why is It Important – Long Term Debt
One of the most important functions for businesses that lenders pay attention to is the debt to income ratio which is effectively the ratio of what a borrower owes versus what they earn. To calculate you simply sum up long term debt versus their income earned. Short term debt is excluded as it relates more to short term obligations such as typical payables and since short term assets such as receivables and even cash.

The purpose of the debt to income ratio is not to show the ability of the borrower to repay their debt now (this is more a function of a debt to equity ratio) but rather to show the ability to repay long term debt in the future as a function of projected earnings. A debt to income ratio more typically shows the ability to repay future debt and is used as a guide to determine the amount that a lender should lend to a potential borrower.

While a debt to income ratio is a useful indicator for people and companies that have steady income sources, it is not a good gauge for those who have income that fluctuates significantly from one year to the next, as is the case with a real estate broker or other professional who earns large bonuses and commissions as part of their salaries. For these individuals, a spike in income in one year may make an individual look like they are able to borrow a lot more when this spike may have been an anomaly based on a one off event.

For certain professions a lender may look to take an average of income for a few years to use as a guide for whether or not to lend money to a potential borrower. Still, a debt to income ratio is a useful tool in many situations and is often used to show the upper limit that lenders will lend.

NOTE: If your debt to income ratio is too high – Learn How to Improve It Here

Gina Wilson

Another post from Gina Wilson – Credit & Loans Specialist Blogger.