Start Your Application with Good Credit:
Your credit report is used by banks and other lending institutions to determine your creditworthiness. The report can be a factor in a lending institution’s decision to approve or decline your mortgage application. You should review your credit report for any errors before submitting your mortgage application.
Stay Within the Range You Can Afford
You need to analyze how much house you can afford (or refinance loan you can assume) before blindly submitting an application with too high of a mortgage amount. Lenders are wary of approving applications that exceed debt ratios. Use any housing calculator for a quick estimate on how much home you can afford.
Understand the True Cost of a Mortgage
Additional monthly costs such as real estate taxes, hazardous insurance, and other home ownership related fees can add to your total monthly payment and reduce the amount of home your can afford. Many times buyers ignore these costs when figuring how much of a home. These costs are considered in your capacity ratios that lenders use to approve your mortgage application.
Make Sure You Have the Capacity to Repay
Your capacity to repay the mortgage loan is a key factor that lenders use to qualify you for a mortgage loan. These ratios determine the level of debt you can consume based on the amount of income you have. Lenders use two debt ratios: The “Housing ratio” and the “Debt-to-Income ratio”
How Much Down Payment Do You Need?
Most lenders require at least 20% down payment on your mortgage application. If your home purchase is $100,000, lenders will require you to pay $20,000 of that amount as a down payment and the lender will finance the remaining $80,000 in a mortgage loan.
Some lenders will now finance up to 95% of the home purchase price (meaning that you raise the other 5%). But you will be required to carry Private Mortgage Insurance (PMI) in order to qualify. Private Mortgage Insurance (PMI) can add to your total monthly cost. To avoid PMI, you will need at least 20% down. Your down payment can be in the form of cash or the resale equity value of a prior home.
Don’t Forget Closing Costs Also consider your available funds that will be needed for closing and settlement. Closing costs can average about 3-7% of the purchase price.
So how much up-front cash will you need to close on your mortgage:
Cash for a Down Payment:
You need at least 20% of the home purchase price to avoid PMI
Cash for Closing Costs:
You should estimate about 3-7% of the home purchase price
Let’s Add Up the Numbers
This will help figure out what parameters you need to change to fit within your budget and income ratios.
the amount of available cash / equity is the cash you have on hand for your down payment and closing costs. Equity refers to the resale equity value of your existing home if any, that will be available to you once you sell your home.
Closing costs is calculated as percentage of the estimated purchase price of the home – this percentage can range between 3-7% depending on your location and number of points.
The American housing survey shows that the median taxes paid averaged $10 per $1,000 in home value. The property insurance paid averaged $30 per month.
You can look up your property tax assessments by community: www.statelocalgov.net
Any percentage LTV that is greater than 80% may require private mortgage insurance, which can add to the total cost of your loan – if your LTV% is greater than 80%, enter 0.005 in the PMI field and recalculate
Loan Pre-Qualification Will Strengthen Your Negotiating Position
Ask at least one lender to pre-qualify you for a mortgage. There is no obligation on you to obtain a loan from that lender, nor does it obligate the lender to provide a mortgage loan. The lender will analyze your credit position, current income, and outstanding debts to give you a reasonable estimate of your borrowing amount.
Which Mortgage Loan Type
There are fixed rate loans, adjustable loans, special financing loans, and a number of mortgage loan variations. We have notes on each one of them. Empower yourself with knowledge to see which one will work for you.
Mortgage Rates Change Daily
Your actual mortgage rate will be determined by your overall credit score, your credit ratios, your location, and your negotiation skills to shop best rate.
You are Now Ready to Submit Your Application with the confidence to negotiate best product and terms. Good luck with your new mortgage!