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Getting Approved for a Mortgage The way a mortgage works is that it is basically a loan approved when you offer your house as collateral. However, inasmuch as the house is the collateral, the lenders are usually not interested in it. The lender wants you to be able to make the monthly payments. Thus, to determine how much you can easily pay back, the lender will carry out a background check on your finances. From the background check, the lender will determine your borrowing risk. Below are some of the things that lenders consider to determine whether or not to approve you for a loan. Amount of Down Payment You Offer Generally, a down payment of 20 percent of the value of the home is required by most lenders. However, keep in mind that there are different types of mortgages available. Thus, you can find mortgages where the down payment required is less. However, if offer a lower down payment, the lender will scrutinize your finances even more. The down payment acts as your commitment to pay off the mortgage. If you put a smaller down payment, you can easily walk away from the payments without incurring a huge loss. This means majority of the loss will be on the lender’s side.
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If you cannot provide a 20 percent down payment for the mortgage, the lender may require you to provide private mortgage insurance (PMI) to be approved for a mortgage. In case you stop paying the mortgage, the PMI will protect the lender from incurring huge losses. There are also a number of mortgages that do not require borrowers to provide PMI. For example, mortgages meant for members of the military and their families usually do not come with a PMI requirement.
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Your Current Debt Obligations Another important thing that lenders consider is the amount of debt you have. In the financial world, this is known as the debt-to-income ratio. Before approving you for a mortgage, the lenders will want to know how much your monthly expenses sum up to. Some of the expenses the lender will want to know about include child support, student loans, alimony and credit cards. Housing, food and other monthly expenses will also be considered. All your debts should not be more than 30 percent of your gross income. If your monthly expenses make more than 30 percent of your gross income, chances are that you will have difficulties paying back the loan. Your Credit Score The lender will also check your credit score to determine how much mortgage to offer. From your credits score, the lender will determine whether you are a low risk or high risk borrower.