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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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