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Mortgage
Requirements
There are four key factors that the
prospective lender will consider above all
else when deciding whether or not to approve
your application, as well as in determining
the amount provided. Here we go through each
of these factors in random order, since
different lenders will place different
weighting on each factor (although the size of
the down-payment is usually of most interest
to a lender).
Qualifying: How and How Much?
Generally speaking, most people will qualify
for a mortgage that is equal to about triple
their annual household gross income, assuming,
of course, that they have steady employment,
relatively little debt, and a good credit
history.
Factor #1: Income
Assuming the above ratio, this means that if
you and your spouse each earn a $50,000 gross
salary each year, you can, on average, expect
to qualify for a mortgage of around $300,000.
Keep in mind, though, that lenders are very
particular when it comes to defining gross
income. If you work lots of overtime or work
in a job where commissions (or even tips) make
up a large proportion of your income, you will
need to prove that this portion of your income
is sustainable. Being able to demonstrate that
you have received a certain amount
consistently in commissions for the past 2-3
years, for example, will help ensure that this
variable income is factored into your mortgage
qualification.
Factor #2: The Down-payment
Generally speaking, bigger is better here. In
other words, the more skin you have in the
game (down-payment), the easier it should be
to qualify for a mortgage, since the lender’s
risk is lower. But what if you don’t have a
lot? You still can get a mortgage, but the
bottom line is that it will be tougher to
qualify, more expensive in the long run, and
there will be more rules to follow. It is even
possible to get a mortgage with zero money
down, but these programs are typically very
costly and should generally be avoided. It is
best to scrape together at least 5-10% of the
purchase price of the home for a down-payment
at a minimum.
Factor #3: Marketability - Location
Remember how we said earlier that a mortgage
is simply a large loan secured by real estate?
Well, here’s where we explain why this
matters. Since the real estate secures the
loan, you need to step for a moment into the
lender’s shoes. How marketable is that piece
of real estate? To give an analogy, if you’re
buying a house in a growing metropolitan area
or subdivision, that’s generally going to be a
secure piece of real estate, since that
property should be relatively easy to sell.
Buying a small farm in a remote location miles
away from civilization is going to be tougher,
since this real estate is not nearly as
marketable. Ultimately what this means for you
as a customer is that the mortgage approved
could be for a lower amount (or turned down
completely) if the property is deemed too
risky from the lender’s perspective.
Factor #4: The Impact of Your Credit History
Your credit history plays a very important
role in qualifying for a mortgage. This is
because they want to make sure as much as
possible that you are going to be consistent
in repaying the mortgage. If you have had a
lot of late payments on credit cards or loans
or have had collection agencies after you, you
will find it more difficult to qualify for a
mortgage. Even something seemingly as minor as
forgetting to make the minimum payment on a
department store credit card can come back to
haunt you if you do this consistently.
Remember, too, that it’s not just what your
credit situation is like today that counts,
it's what your credit history has been like
over the last five or six years. One way you
can check on that history is by ordering your
credit report.
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