mortgage loan application and agreement form

What is a mortgage?

Mortgage is a loan for real estate that you can borrow from your lender and repay over a set number of years. The lender however would want assurance that you’ll be able to repay the money timely. So, the approval depends on several factors.

The primary ones are:

  • Income – You may have to provide documentation to verify your income and federal tax returns.
  • Debt-to-income ratio – DTI is the calculation of the total gross monthly debt divided by the total gross monthly income. To be eligible for a lower rate of interest and to get approved, you need a lower DTI.

A mortgage loan differs from other kinds of loans in 3 ways:

1. It has a longer term

Some mortgages can run for as long as 30 years. The term can, however, be long or short depending on a number of factors including the amount of the down payment. A longer term makes the mortgages affordable as the monthly repayments are small. The flipside is that you end up paying more interest.

2. A mortgage loan is secured against the value of the purchased property

The mortgage provider has the right to take away your property and sell it off if you are not able to keep up with the monthly payments.

3. The full purchase price cannot be the mortgage

A portion of the full price (the down payment) has to be paid out of your pocket. The larger your down payment, the better will be the terms of your mortgage.

What to do before applying for a mortgage?

Ensure that your finances are in order before enquiring because most of the mortgage lenders have strict approval procedures. The extent of the options depend considerably on the credit score, amount of down payment and your financial situation.

Check your credit score

It gives the lender an idea of the payment history and your financial history of paying back your debt. A lower credit score would automatically mean a higher rate of interest. You might appear risky to mortgage lenders if the credit report suggests that you have struggled to repay debt in the past. When you have a good credit score, chances are that you will get approved with a low interest rate.

Track your spending

Lenders make an assessment to determine how much you can borrow. While doing so, they also look at your expenses and not just the income. They also consider what might happen if your financial situation changes in future. Prepare for this by gathering your monthly expenses that include utility bills and even the amount you spend on grocery.  Try to reduce your monthly expenditure as much as possible.

 Save up for the down payment

Before approaching the lenders, try to save as much as possible for the down payment. Banks offer many plans to help you save up for the down payment.

Shopping for a mortgage

Speak to lenders once you have an idea of your financial situation. Here you have two options:

  1. Talk to a bank – A bank is the most obvious choice while looking around for a mortgage. Most banks offer huge discounts and exclusive deals if you are already their customer. A loyalty discount looks advantageous but you might also get a better deal elsewhere. So before deciding compare the offers by meeting a mortgage lender.
  2. Talk to a mortgage broker – The mortgage brokers shop around for you and a good lender even explains you the options so that you choose the best deal. A mortgage lender can offer valuable advice.

How to apply for a mortgage?

Mortgage and house hunting go hand-in-hand. It occurs in two stages:

  • Finding facts –In this stage the lender finds out as much as possible about your needs. You can talk to several different lenders to find out the best offer. They let you know how much they are prepared to lend you.
  • Approval in principle – Once you decide which lender you would like to proceed with, ask him/her for a written statement that says that he/she would be happy to lend you the required amount. An approval in principle presents you as a more attractive buyer because it shows them that you can afford to buy the property.

Getting the mortgage

It involves the credit check and affordability assessment. The property is checked for probable problems and compared to similar properties. This way the lender ensures that you are paying a suitable price for the property. The lender approves the application when everything is in proper order.

You get a legally binding offer and the lender is now obliged to give you the funds required for purchasing the property. There is a reflection period during which you can change your mind. Once you sign the offer and all the other sale formalities are completed, you finally get the keys to your new home.

Conclusion

Being able to control your savings brings a high chance of getting approved. A bigger down payment means a more affordable mortgage. Shop around and compare the prices before committing to a mortgage. Happy house hunting!

 

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