Buying a home with the help of mortgage financing is one of the most important commitments you can make in life. To close the deal, you are likely to take on hundreds of thousands of dollars in mortgage debt, upon which you will be responsible for making several thousand dollars worth of interest payments each year. Because of the size of this transaction, it is critical that you get your finances in order to qualify for a good mortgage, so that you may save money on interest and avoid foreclosure.
Real Estate Collateral
A mortgage is a secured loan, which is backed by real estate as collateral. These collateral provisions stipulate that the bank carries rights to seize your home and auction it off to make good on missed payments. To protect its own financial interests, the bank will have the home appraised to verify that its value is at least equal to your original mortgage principal. You can put down at least 20 percent of the home’s purchase price in cash, in order to increase your chances of qualifying for a good mortgage. The Federal Reserve Board says that a 20-percent down payment allows you to avoid the need for private mortgage insurance (PMI). PMI pays out a cash settlement to the bank in the event of your mortgage default and may cost you hundreds of dollars in premium payments each year.
Order Credit Report
You should order a copy of your credit report and score before you complete any mortgage application. At any time during the year, you can purchase a copy of your credit report and score from Experian, TransUnion, or Equifax. The credit report organizes your outstanding debt balances according to type, size, and payment history. You should also be certain to check your credit report for errors and dispute false information with the appropriate agency. According to Bankrate.com, you can qualify with the best mortgage rates if your credit score is above 760. To improve your credit score, you must continue to make timely payments while also keeping expensive credit card debt to a minimum.
Analyze Personal Finances
In terms of affordability, you should target a monthly mortgage payment that is less than 30 percent of your monthly gross income. You should also maintain a debt-to-income ratio of less than 36 percent. This means that your total debt payments for your mortgage, car note, credit cards, and student loans should be less than 36 percent of your gross income. To anticipate the size of a future mortgage payment, you can pull up an online mortgage calculator and toggle through property tax, private mortgage insurance, principal, and interest rate projections.
Warning
Be certain to fill out all mortgage application paperwork completely and truthfully. Mortgage fraud may put you into a home that you cannot afford and is also punishable to the full extent of the law. Avoid and report aggressive lender representatives, who pressure you to file false home loan application information in order for you to qualify for a larger mortgage.
How to Qualify for a Good Mortgage, Sources:
Federal Reserve Bank of San Francisco: Private Mortgage Insurance
Bankrate.com: How credit scores affect mortgage rates
CNNMoney: Affordable Home Calculator
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