9 Factors to Consider When Applying for a Mortgage
Everybody wishes to achieve their dream of living in a comfortable and safe home based on their needs, preferences, and resources. In many instances, people who cannot afford to purchase a home on a cash basis usually apply for a mortgage. Therefore, it is essential to understand vital elements such as the type of loan that suits your income and revenue and how it influences your down payment. Applying for a mortgage can be an overwhelming process, but with the help of a Mortgage Broker, things can become much easier. One important factor to consider when applying for a mortgage is your credit score. Lenders often look at this three-digit number to determine your creditworthiness. It’s crucial to check your credit report beforehand and address any discrepancies or issues that may negatively affect your score.
Credit Scores
A person’s credit score plays a significant role when getting approved and applying for a mortgage. When a person has a high credit score, they may qualify for a mortgage with lower interest rates, while if the credit score is lower, the mortgage interest rate will be higher. Besides, people with low credit scores usually face difficulties getting approval.
Earnings
Typically, lenders need a stable income source for a person to qualify for a mortgage. However, people usually get monthly income from other sources like child support, alimony payments, tips, and stock dividends. Self-employed people usually face challenges when applying for mortgages due to irregular income flow. However, Cane Bay Partners CEO suggests that self-employed people can increase their approval chances by having a large amount of savings and a prime credit score since lenders view you as a lower risk.
Debt and Income
Lenders use a person’s debt-to-income ratio when evaluating their risk. Many lenders apply 28/36 as the qualifying ratio. Generally, 28% signifies a person’s pre-tax gross income amount for monthly housing costs such as homeowners insurance and principal interest payments. 36% represents the income amount that can be used for housing costs and recurring bills like credit card debt and auto loans.
Money Down
Most mortgage lenders need a down payment. Although conventional loans need 5% to 20% of the total home cost, government-insured loans need fewer down payments. The down payment also influences the loan-to-value ratio or the equity amount of the home compared to the mortgage. Therefore, if you opt to place a bigger down payment, you will start with bigger equity in your home. As well as making sure the down payment is affordable for you, it’s also crucial to shop around for the Best Rates on Canadian Mortgages (or wherever you reside) by doing an online search or speaking to your local mortgage broker or bank. It’s important to remember that the lower the rate, the lower the monthly payments will be – so as well as a higher down payment, it’s always important to get the lowest rate possible, as this helps affordability.
Cash Leftover
Liquid reserves are the amount of cash left behind after closing costs and the down payment. They usually originate from various sources, such as stocks, bank accounts, or bonds. Mortgage providers factor a person’s liquid reserves into their mortgage terms and approval. Applicants with a larger amount of liquid reserves are usually perceived to have lower risks.
Mortgage Insurance
Although mortgage insurance covers the lender when a borrower defaults on the loan payment, some mortgage applicants do not pay for the insurance policy. Typically, lenders require insurance for the mortgage if an applicant places a down payment of less than 20%. People can avoid paying mortgage insurance by placing a higher down payment, agreeing to a second mortgage, or paying higher interest.
Preapproval
For many mortgage applicants, receiving a loan usually entails several processes. Once a person examines different requirements and mortgage types, it is crucial to seek preapproval from the mortgage provider. This means that the lender has examined supporting documentation and credit profile, and if there are no changes, the mortgage will be approved if a person opts for a house within a specified price range. You can opt to work with private mortgage lenders also, and this will eliminate the length of time it takes to get approved, and is a good option for those with poor credit history, or none at all.Â
Sale Price
A mortgage usually depends on the house price. For instance, if you intend to purchase a house with a higher price range than the preapproved limit, you need to deposit a higher down payment or renegotiate the price of the house to a lower amount. A less costly house reduces the down payment amount and also reduces the monthly housing payment.
Closing Costs
Mortgage providers charge one-time closing costs, including various administration costs such as application fees, charges to get the credit report, home appraisal fees, and title insurance. Closing costs are usually about 3% to 4% of the total sale price of the home.
Applying for a mortgage can materialize a person’s dream of owning a home. However, it is essential to evaluate different factors before commencing the process.
