When applying for a mortgage, your home automatically becomes the security bond. The lender will hold your house and land as collateral for the loan. This is not because the lender is planning something scheming to get your home. They just need a guarantee so that in case the customer defaults in payments, they can still get their money back through a sale. This is the very reason why lenders are very careful in evaluating credit credentials to ensure you are worth the risk they will be taking.
To get started, you will need to ready your documents to be presented to the lender, but you need to understand the terms and conditions needed to qualify for a mortgage.
In a home purchase, the lender will require the buyer to make a down payment, which represents only a fraction of the full purchase price. Buying a home is a very expensive transaction and this mode of payment makes it more affordable for a typical individual to acquire an asset. Generally, lenders will require a 20 percent down payment of the property value. Borrowers who cannot afford the 20-percent down payment may be required by the lender to take out a private mortgage insurance.
Some lenders accept as little as 5 percent of the home value without the need for PMI as long as you have an outstanding credit profile.
Loan to value
This is the amount or estimated value of property acceptable for mortgage, calculated by dividing the amount of mortgage by the property’s appraised value. A high LTV will lead you pay a lower down payment but the lender may put a higher interest rate on your loan.
It’s important for borrowers to look into two factors when it comes to debt ratios. The first factor is the front-end ratio (or housing ratio), calculated as the estimated monthly payment for the house divided by your gross monthly income. As a general rule, a buyer’s monthly housing payment (inclusive of the principal, interest, insurance and taxes) must not be more than 28 percent of his income prior to taxes. The second factor is called the back-end ratio (or overall debt ratio), which involves the sum of housing expenses and revolving debt, divided by the gross income. A back-end ratio of not more than 36 percent is preferred by lenders.
The lender will typically conduct an investigation on your credit history, from which the credit score will be assigned to you. Most lenders use three scoring models to analyze your record, and set the median score as their basis for your qualification. Lenders use the FICO (Fair Isaac Corporation) model as basis for the credit score, which may range from 350 to 850.
Buyers with high credit scores have a good chance of qualifying for a mortgage and obtaining a higher loan approval. The median FICO score is 723, but you only need at least 680 to get an “A” rating.
Automated Underwriting System (AUS)
This modern method allows you to get approved for a mortgage even without a face-to-face discussion with the lender. AUS allows any borrower to request for loan qualification through automated software that investigates your credit history. Lenders will use the information provided by AUS in considering a prospective borrower. This system can save a significant amount of time because manual underwriting can take as long as 60 days to process.
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