Getting a mortgage is a complicated process. After all, its not like small loan for a used car or even a new car. A lot of money is involved in a mortgage and therefore, there is a lot of risk involved on the lenders part. That’s why there are a ton of requirements and qualifications that need to be met before a lender is willing to provide a borrower with a loan. Every bank is different when it comes to specifics and different types of mortgages come with different requirements too. If you are looking to take out a mortgage, you should be aware of the most essential requirements when it comes to taking out a mortgage. Read on to learn more about the requirements for mortgage loans.
Income
The first thing every borrower should consider before stepping into a bank is their income. Before a lender will consider you for a mortgage loan, they will want to see what you can afford. Most lenders will not want a borrower’s mortgage payments to exceed 28 to 44% of their income, unless the borrower has an excellent credit score. Therefore, make sure you keep track of your monthly expenses and income to be sure you can make the necessary mortgage payments every month. To help you do this mortgage calculators which can be found on bank websites or on the Mortgage Calculator website can be a good place to start calculating how much you can afford to pay. Job history may also be considered if a lender is concerned that you cannot hold a job.
Highlights
- Mortgage payments should not exceed 44%
- Keep track of expenses
- Use mortgage calculators
Credit Score
Credit score, of course is an extremely important consideration when it comes to mortgage consideration. Lenders will look at your credit score to not only see if you qualify for a loan, but how much you qualify for. They will also check to see the interest rate at which you qualify for. If you are considered a greater risk as a borrower, you may have to pay more in interest per month, before you can be accepted for a mortgage loan. A borrower will take into consideration multiple credit scores including your TransUnion, Equifax and Experiean scores. Paying bills late or missing payments altogether will greatly reduce your credit score over time.
Highlights
- Considers TransUnion, Equifax and Experiean scores
- No late payments
- Can affect eligibility and interest rate
Credit History
In addition to credit scores, lenders will also want to examine a borrower’s credit history. If a borrower has a history of late payments, missed payments and derogatory marks from collections, they may be seen as a greater risk to the lender and less likely to acquire a loan. Recent bankruptcy can also affect an individual’s ability to get a mortgage loan for a long period of time. Other things lenders will want to look at are your credit cards, checking out whether they are all maxed out and whether there are excessively monthly payments being made.
Highlights
- Avoid bankruptcy
- Avoid late payments
- Keep credit card usage down
Appraisal
Appraisal is a tremendously important part of the mortgage approval process. Before a mortgage amount can be approved, the home must be appraised. The value of the home must meet the mortgage amount. A borrower cannot pay more for a home than the home is worth, nor can the borrower borrow more than the value of the home. If a property is found to be worth less than the seller is asking for then a lower price must be negotiated.
Highlights
- Home must be appraised
- Mortgage amount cannot exceed home value
- Home cannot be sold for more than it is worth
Down Payment
Before getting approved for a mortgage, you must consider the down payment requirement. The down payment requirement will be different from person to person based on their income, credit history and the other above mentioned factors. The maximum required down payment will usually be around 20% but it can be as low as 3.5% with an FHA mortgage loan. Generally, you should pay at least 10% at the beginning which will make it much easier to close your mortgage loan.
Highlights
- Should pay at least 10%
- Maximum amount of 20% may be required
- FHA loans can require only a 3.5% down payment
Conclusion
Buying a home is no easy task. There are plenty of requirements every borrower and lender must take into consideration before a mortgage approval. By meeting these requirements, you may sooner be on your way to getting your very own mortgage loan.