What You Need To Know When Applying For A Mortgage

If you are contemplating applying for a mortgage, then there are some important financial issues that you need to be aware of. Mortgage lenders have rather precise criteria for judging the credit-worthiness of applicants, and this article includes what you need to know when applying for a mortgage.

Know Your Credit Scores

Your credit scores compiled by each of the three major credit bureaus will fall between 300 and 850. You can find your credit scores by visiting www.annualcreditreport.com. Another score is compiled by Fair Isaac and you can obtain this score online also. The best interest rate and terms require credit scores of about 720. Some lenders will consider applicants with lower scores, but the interest rates will be higher. If you are working with a mortgage broker, then they will find the best available rates and terms.

Know Your Income-to-Debt Ratio

Lenders use this ratio to determine whether you can make a house payment which includes the principal, interest, property insurance, taxes, and a private mortgage insurance premium if any is required. Let's look at how this works. To qualify for an FHA mortgage, your total house payment cannot be more than 29% of your gross monthly income. Your total income-to-debt ratio cannot be more than 41% including your house payment, and this ratio is determined by adding your monthly debt service to your house payment. This means that debt service includes credit card debt, car payments, student loans, child support, alimony and any other obligation which requires an ongoing monthly payment. This is another situation where a mortgage broker can assist your efforts to find the best mortgage available if your ratio is higher than the highest stated ratio.

Know The Amount Of Your Down Payment

This is a little more complicated than it appears to be. Your down payment should come from money you have saved or from a recent property sale. There may be an exception for gifts from parents, but you should still be able to demonstrate that you have saved money every month to use for a down payment. If you have not been able to save money from your income, then you will have to demonstrate how you can make the mortgage payment if it is higher than your current housing expense.

Your credit scores will be a major factor in determining the amount of the down payment. For example, if you have high credit scores, you can get an FHA loan with 3.5% down, but you could be required to put as much as 10% down if your scores are low. The best interest rates are only available to applicants who can put 20% down and who have good credit scores.

Know that you can Get Help In Finding The Best Mortgage

Mortgage brokers work with many lenders and they know the lenders that will work with applicants who have a financial status that does not comply with the customary criteria. Discuss your situation candidly with a broker, and you will have at least explored every option available.