Remember, what you qualify for may not be what you can
afford--only you can determine that after examining your own budget and
lifestyle.
| | Applying for a Mortgage
Mortgage prequalification vs. preapproval
Once you have an idea of how much of a mortgage you can
afford, you'll want to shop around and compare the mortgage rates and terms
that various lenders offer. When you find the right lender, find out how you
can prequalify or get preapproval for a loan. Prequalifying gives you the
lender's estimate of how much you can borrow and in many cases can be done over
the phone, usually at no cost. Prequalification does not guarantee that the
lender will grant you a loan, but it can give you a rough idea of where you
stand. If you're really serious about buying, however, you'll probably want to
get preapproved for a loan. Preapproval is when the lender, after verifying
your income and performing a credit check, lets you know exactly how much you
can borrow. This involves completing an application, revealing your financial
information, and paying a fee.
Generally, if you're applying for a conventional mortgage,
your monthly housing expenses (mortgage principal and interest, real estate
taxes, and homeowners insurance) should not exceed 28% of your gross
monthly income. In addition, most mortgages require borrowers to have a debt-to-income ratio that is less than or
equal to 43%. That means that you should be spending no more than 43% of your gross monthly income on longer-term debt payments.
It's important to note that the mortgage you qualify for or
are approved for is not always what you can actually afford. Before signing any
loan paperwork, take an honest look at your lifestyle, standard of living, and
spending habits to make sure that your mortgage payment won't be beyond your
means.
Before you apply
Do some homework before you apply for a mortgage. Think
about the type of home you want, what your budget will allow, and the type of
mortgage you might want to apply for. Obtain a copy of your credit report, and
make sure it's accurate; you'll want to dispute any erroneous information and
quickly correct it. Be prepared to answer any questions that a lender might
have of you, and be open and straightforward about your circumstances.
What you'll need when you apply
When you apply for a mortgage, the lender will want a lot of
information about you (and, at some point, about the house you'll buy) to
determine your loan eligibility. Here's what you'll need to provide:
- The name and address of your bank, your account numbers,
and statements for the past three months
- Investment statements for the past three months
- Pay stubs, W-2 withholding forms, or other proof of
employment and income
- Balance sheets and tax returns, if you're self-employed
- Information on consumer debt (account numbers and amounts
due)
- Divorce settlement papers, if applicable
You'll sign authorizations that allow the lender to verify
your income and bank accounts, and to obtain a copy of your credit report. If
you've already made an offer on a house or condo, you'll need to give the
lender a purchase contract and a receipt for any good-faith deposit that you
might have given the seller.
Finalizing the application
As your mortgage application is processed and finalized,
your lender is required by law to give you
a Loan Estimate within
three business days of receiving
your application.
The Loan Estimate is a form that spells out important information about the
loan you applied for, such as the estimated interest rate, monthly payments,
and total closing costs for the loan.
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