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Qualifying For A Home Loan
When considering your application, lenders look at factors such as your ability and willingness to repay them.
Your ability to repay is verified by your current employment and total income. Your willingness to repay is closely related to how you've fulfilled previous financial commitments. This is why lenders place such an emphasis on your credit report.
It is important to remember that there are no rules carved in stone. Applications are handled on a case-by-case basis. So even if you come up a little short in one area, perhaps one of your stronger points will make up for the weak one.
Low down payment mortgages
Even if you do not have a lot of money to use as a down payment, you still may be able to purchase a home. More and more borrowers are taking advantage of low down payment mortgages and becoming homeowners with as little as five percent down. With these loans, however, you may be required to carry private mortgage insurance (PMI).
This information is adapted from "A Consumer's Guide to Mortgage Lock-Ins" published by the Federal Reserve Board and the Office of Thrift Supervision.
Finding The Best Mortgage
There are dozens of mortgage products available. Here's help in picking the one that's right for you.
Home buyers can choose from many different types of mortgages. The basic models are fixed rate mortgages and adjustable rate mortgages or ARMs. More choice is created when lenders vary the term of the loan, change the way the principal amount you owe is paid off or amortized, or add features such as a conversion option or prepayment privilege.
“In addition to the traditional 30-year fixed rate mortgage, there are dozens of mortgage loan products available, from adjustable rate mortgages to interest-only and negative amortization loans,” says LendingTree’s Chief Consumer Officer, Ed Powell.
The factors you should take into account when choosing your mortgage include:
- what you can afford to pay each month based on your current income.
- whether you expect your income to rise, fall or stay the same over time.
- whether you plan to stay in the house long-term or move in a few years.
- your tolerance for risk.
- whether you expect interest rates to rise, fall or stay about the same.
- Taken together, these factors narrow the range of mortgages that you should consider.
Take this scenario: you and your partner both earn good money and expect your salaries to rise. You plan to move in five years and expect interest rates to stay about the same or even fall during that period.
Under these circumstances, you might choose a five-year balloon loan.
A five-year balloon is a good choice because the term matches the length of time you expect to own the house. If you sell after five years, you will have no early redemption penalty. If you decide not to move, you can refinance when the mortgage matures, and possibly pay down the principle while you're at it.
Here’s another, quite different, scenario that leads to a different mortgage choice: your income is low and/or fixed. You plan to stay in your home for many years, and expect interest rates to rise.
You will likely choose a traditional 30-year fixed rate mortgage. The 30-year term and fixed rate allow you to lock in affordable monthly principal and interest payments for the long term. You know your installments will be manageable, and you will be chipping away at the principal of the loan and building equity slowly but steadily.
With all the options available, there’s bound to be a mortgage that suits you and your situation. Powell suggests you talk to a loan officer at your bank about the choices. “Taking the time to learn about the process is worth it, because you’ll be a better advocate for yourself,” he says.
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