Starting Your Mortgage Application

By JJ Singh
Loan Page Columnist

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What does it take to get a home mortgage? The strength of your application lies in three main areas: coverage, credit, and collateral.

Cover Your New Home Loan

First, do you have coverage? Coverage is just a fancy term bankers use to determine whether you make enough money to make loan payments. Typically, lenders use an analysis tool known as "28 and 36." In other words, your monthly mortgage payment should be less than 28% of your gross monthly income while your total debt payments (credit cards and mortgage included) should remain under 36%.

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Get Credit for Paying Your Bills

Your credit report is a critical way for lenders to assess risk. Your score need not be a perfect 850 to qualify; 700 or better will keep you in the running.

A higher credit score doesn't just help you qualify for a loan, it can also lower your mortgage interest rate significantly. The difference between one or two interest rate percentage points can be a few hundred thousand dollars over 30 years.

Impress a Banker with Mortgage Collateral

Lenders are always looking for as much security on a loan as possible. After extending you credit, the bank will take out a lien on your property, having first rights to it in case you default.

As you might imagine, the more your house is worth relative to the loan, the more security the bank will have. Before obtaining your new home loan, be sure to obtain an assessment from a reputable authority so you don't get shortchanged.

Using these three simple tools can help you evaluate your prospects for a new home loan. Thinking as a lender could help you get the home you want and save a pile of money doing it.

Sources:

Home Mortgages: The Mortgage Application Process

About the Author

JJ Singh is a loan consultant who has mortgaged his life away to the micro finance industry in New York City. He holds a bachelor's degree in Economics from the University of Virginia.

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