How to Qualify For a Mortgage
A mortgage is a loan used to buy a home. A mortgage lender provides the money, which a borrower repays in monthly payments with interest over time. The lender can foreclose on the property if the loan is not paid.
A mortgage payment is a combination of principal and interest, plus other costs such as taxes and insurance, which are referred to as PITI. It’s important to understand the details of your mortgage so that you can make informed decisions about how much you should borrow, which type of loan is best and how to pay it back.
The amount you can afford for a mortgage depends on your income, debts and savings. A lender will check your credit history, and then calculate your debt-to-income ratio (DTI) to determine if you can comfortably meet your mortgage payment. A high DTI can make it difficult to qualify for a mortgage and you may be required to pay down other existing debt before you can get approved.
Down payment: A down payment is the amount of cash you put up upfront in order to purchase your home. It’s usually a percentage of the home’s value and can help you qualify for a lower mortgage rate.
Savings: Lenders want to see that you have enough saved to make your mortgage payments if your income goes down. They also look at how well you manage your money, which includes checking and savings accounts, stock investments and other liquid assets.
Debt-to-income Ratio: Your DTI compares your total debt payments – including the mortgage, and other credit card and car payments – to your pre-tax income. A DTI that exceeds 50% can be a sign that you may not be able to afford the mortgage and you should consider refinancing.
Credit score: A good credit rating can help you qualify for a low mortgage rate. It’s always best to work on improving your credit before you apply for a mortgage, as it can save you thousands of dollars over the life of your loan.
Assets: Your assets such as savings, stocks and cars are also factors in determining your ability to pay off a mortgage. They can help you create a buffer to fall back on should your income suddenly go down, as well as serve as emergency funds for unexpected expenses such as medical bills and household repairs.
Mortgage Calculator: The mortgage calculator is a simple tool that allows you to enter your loan details and determine how much of your monthly payments are going toward the interest or the original loan balance. You can also use the mortgage calculator to see how your payments will change over time as your mortgage balance grows and shrinks.
A mortgage is the biggest financial commitment most people will ever take on. It’s a big investment that can lead to a lot of equity and value appreciation, which may help you build your wealth in the long run.