Looking to purchase a home? Unless you have hundreds of thousands of dollars at your disposal, you’ll need to get a mortgage. A mortgage is a loan specifically designed for the purchase of property. It allows you access to money upfront, with a plan to repay the loan and its interest over the course of a designated number of years.
Let’s chat “mortgages”. Read on to learn all about how you can get approved for your mortgage and purchase the home of your dreams.
How Do Mortgages Work?
A mortgage is what’s known as a secured loan, meaning one that is “secured” by collateral. While collateral is a blanket term used by lenders, with mortgage loans the collateral is one single thing: your home. When you apply for a secured loan, you make an agreement with your lender that, if you fail to pay back your loan, they have the right to seize your home. This is known as foreclosure.
How Do I Apply for a Mortgage?
In order to apply for a mortgage, you’ll need to show a lender a clear picture of your financials. That includes things like your income, your debts, your credit score, and your prospective down payment. They will assess this information and put a loan offer together for you. Your financial situation will determine the interest rates and terms of your loan. If your financials are good, you can also get mortgage pre qualify.
Factors that Determine Your Mortgage
Remember the housing crisis of 2008? Much of what contributed to that catastrophe was a type of lending known as subprime mortgages. A subprime mortgage is a mortgage loan issued to a borrower with poor credit. These mortgages have extremely high interest rates because the lender does not feel confident in the borrowers ability to pay back the loan
In the years leading up to the 2008 housing crisis, mortgage lenders began issuing subprime loans in droves. People with credit scores in the low 600s were suddenly approved for mortgages. These loans did not require proof of income, assets, or a down payment. Quickly, borrowers began to default on their loans and were forced into foreclosure. This was a significant contributor to the housing market crash. As a result of this crisis, the subprime mortgage industry collapsed.
These days, not just anyone can get approved for a mortgage. In order to be approved for a mortgage, lenders must feel confident that you are likely to pay back the mortgage. To determine this, they look to your income, credit score, and debts.
Income
In order to get a clear picture of your income, mortgage lenders typically want at least 2 weeks of pay stubs. If you’re a standard W-2 worker, this is typically a pretty simple process; you’ll just need to provide the required documentation.
For self-employed workers or those with variable income, things can get a bit more complicated. If this describes your situation, consider exploring bank statement loans. This type of mortgage looks at 12 or 24 months of your bank statements to verify your financials, rather than your income. All deposits over the determined period of time will be seen as income.
Credit Score
Your credit score is a significant determinant of your mortgage terms. As a general rule, your credit score will need to be above 680 to qualify for a loan and should be above 700 if you want good terms. If your credit score isn’t where it needs to be, consider spending some time improving it prior to applying for a mortgage. Pay your bills on time and use less of your available credit limit.
If you want to learn more, read this guide about what actions you can take to improve your credit score today.
Debt
Debt is also a large factor in your mortgage terms. Lenders look at debt in tandem with income to determine whether the borrower has significant enough income to both pay off their existing debt and the new debt of a mortgage. Because of this, it’s a good idea to pay off any debts as much as possible prior to applying for a loan.
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