Applying for Financing

Applying for a mortgage can be a stressful and time-consuming process. Staying organized and in regular contact with your loan officer will reduce your stress and reduce uncertainty throughout the process.

Application Criteria

When lenders are considering whether to approve your loan application, they usually consider the following:

Credit Score- a statistical number that evaluates a member’s credit worthiness and is based on credit history. Lenders use credit score to evaluate the probability that an individual will repay their debts. Credit scores typically range from 300 to 850, with the higher the score, the more financially trustworthy the person is considered to be.

Down Payment Amount and Other Assets - In most cases, a mortgage lender wants you to pay a certain percentage of the overall loan amount as a down payment on the home purchase. The amount of money you have saved for a down payment will determine what size of loan you will be able to qualify for.

For example, if your lender is requiring a 10% down payment and you have $20,000 saved, you could qualify for a loan of up to $180,000 ($200,000 maximum purchase price less the $20,000 for the down payment.) Lenders also want to see that you have funds left over after the down payment and closing costs are paid out.

Employment History - Most lenders prefer to see two years of consistent employment in the same field. If you are self-employed, lenders will require additional documentation as proof of income.

Income - The standard has traditionally been that lenders require the total of your mortgage payments not exceed 28-33% of your gross income each month, though some lenders will make an exception. Often referred to as the "front-end ratio", this figure will be calculated using pay stubs or two years worth of tax returns.

Debt - The normal requirement is that your monthly payments on existing debt not exceed 36% of your gross income, although there can be some flexibility in certain cases for this number too. This percentage is often called the "back-end ratio".

Examining Your Budget

If the lender approves you for a $350,000 mortgage, that means you can afford a $350,000 mortgage, right? Not necessarily.

Lenders typically only look at a few factors, namely your income, debt, and down payment. However, you have more expenses than your debt. Your budget also includes food, utilities, entertainment, or childcare for some. While your income and expenses can change after the home purchase (for example, net income may increase due to the tax benefits of owning a home, and utilities often increase too since houses tend to be larger than apartments), creating a budget gives you a more precise idea of what you can afford to spend. Subtract your expenses (excluding what you are spending now for rent) from your income to get an estimate of the monthly payment you can afford. You will also have to pay property taxes and homeowners insurance.

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