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Everything You Need to Know Before Applying for a Mortgage

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Applying for a mortgage can seem overwhelming and complex. But with some preparation, it can make the experience less stressful and more successful. Here are some things to consider before beginning the application process:

Your Credit Score and Personal Finances
Lenders will consider your credit score when deciding whether or not to approve or decline a home loan application. A good score can help you qualify for a lower interest rate, saving money in the long run. Moreover, it indicates whether or not you are an appropriate investment and likely to pay back debts. Therefore, it’s essential that you check your credit report and score prior to applying for a mortgage so any mistakes can be rectified ahead of time.

Your Down Payment and Other Finances
Lenders want to ensure that you can afford the monthly payments on a mortgage, as well as any extra costs associated with home ownership. They take into account your income, assets and debts to determine how much money you qualify for. Typically, lenders follow the 28/36 rule: A mortgage shouldn’t exceed 28% of gross income and total recurring debt shouldn’t exceed 36% of monthly gross income.

Your lender may require proof of income and a comprehensive list of your debts, such as pay stubs, bank statements and tax returns. Furthermore, they will want to see an exhaustive inventory of assets and all financial accounts.

Self-employed individuals may require more documentation than employees of a company, so be prepared with your W-2 form and profit/loss statements from the last two years.

Your Down Payment and Other Finances
You can reduce your monthly payments by contributing more of your own money towards purchasing a home. Depending on the type of mortgage, this could range anywhere from 3% to 20% of the purchase price for the property.

Increased down payment amounts can lower monthly interest rates and shorten repayment timeframes on loans. Furthermore, making a larger down payment increases your loan-to-value ratio (LTV), making you more desirable to lenders.

Your Down Payment and Other Finances
A lender will require that you have enough money in savings or other financial accounts. Savings can protect you from unexpected expenses like property taxes or medical bills. With enough funds saved, it may be possible to cover these unexpected costs.

Your Down Payment and Other Finances
It is wise to begin saving for a down payment before beginning the mortgage application process. Doing so will give you an advantage in the process and guarantee that you can close on your home quickly.

Your Down Payment and Other Finances
In addition to making a substantial down payment, it’s essential that you have enough extra money saved up for closing costs on your new home. These may vary by lender but could include things like appraisal fees, title insurance and closing expenses.