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Qualifying for a Mortgage A mortgage is basically approved when you provide your land or house as collateral for the loan. 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. The lender will determine how risky it is to approve you for a mortgage from your financial background information. To determine whether or not to approve you for a loan, the lender will consider the following: 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, it is important to know that there are various types of mortgages you can apply for. You can also find mortgages where you are not required to pay 20 percent as down payment. However, if you will be offering a down payment of less than 20 percent, the lender will scrutinize your finances more. The down payment acts as your commitment to pay off the mortgage. If you have not put down a larger down payment, you can walk away from the mortgage deal and will not incur a big loss. This means your risk in the mortgage transaction will be lower than that of the lender.
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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. You can also apply for different mortgages that do not require insurance. A good example of such mortgages are those tailored of members of the military and their families.
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Amount of Debt You Currently Have 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. The lender will want to know all the current debts that you pay on a monthly basis. Examples of these may be child support, alimony, student loans, and credit cards. Other expenses you incur on a monthly basis such as housing and food will also be considered. Generally, your expenses should not total to more than 28 percent of your gross income. If your recurring expenses are more than 30 percent of your gross income, you may find it difficult to pay back the loan. Your Credit Score Your credit score will also be checked so that the lender can know how much mortgage to offer. Depending on the credit score you have, you may be classified as either a high risk or low risk borrower.