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Most of us need a mortgage to purchase a home. And Lenders will only approve a mortgage if they determine that you’ll be able to repay it.
Before you start picking the paint colors consider what it takes to get approved.
The following factors can determine whether you get approved: Your credit history, your debt-to-income ratio, and your liquid assets.
Let’s talk about credit history:
Have you had a credit card for awhile? Do you pay your bills on time? Do you pay more than the minimum due? Do you stay well below your credit limits?
Your lender will find answers to these questions on your credit report, and get your credit score as well. A score can be as low as 300 and as high as 850. You may qualify for many types of loans even with a low credit score.
But lenders look at other things besides credit scores, like whether your debt-to-income ratio is below their guidelines. 43% is a typical benchmark.
Debt-to-income compares your gross monthly income to how much you are obligated to pay out each month.
Let’s say you get paid $4000 every month before taxes. But once you’ve paid your monthly debt obligations, like this new mortgage, you’re left with just $1800. This would mean your Debt to Income Ratio is 55%.
If you could shave $500 off those monthly obligations, your DTI would be less than 43%, which should allow you to pay for many other necessities each month.
After covering your down payment and closing costs, your lender will also want to make sure you have enough in reserve to cover unexpected situations that may arise once you’re a homeowner.
For that you need liquid assets, such as a savings or checking account, or a retirement fund you can tap into.
But Government-funded assistance programs may be able to help with your down-payment and even closing costs. And that can positively affect the way lenders evaluate your available assets!
Understanding how a lender decides whether to approve your mortgage helps you find out if you’re ready to be a homeowner. The path to homeownership is a journey, with lots of tools and options that can help you reach your goal.
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