4 Important factors that determine your loan eligibility
Purchasing a home is perhaps the biggest financial decision in your life. While purchasing a home, the obvious question that may arise is, “how much of a mortgage can I afford?” Your ability to take out a home mortgage loan depends upon several factors. Lenders take into consideration various factors before offering you a home mortgage loan. You must be very much calculative, prudent and well informed before making the decision whether or not to purchase a home mortgage loan.
Front end ratio
Lenders take your front end ratio very seriously while offering you a home mortgage loan. Front end ratio is calculated by dividing your monthly mortgage payment by your gross income. The monthly payment amount includes four items – principal, interest, taxes and insurance. This is collectively known as PITI. Higher the front end ratio, lower is your chance to obtain the mortgage loan and vice versa.
Back end ratio
Another ratio which is very important in determining your eligibility to obtain the home mortgage loan is the back end ratio. This ratio is also known as debt to income ratio (DTI). The DTI ratio measures the proportion of your gross income that goes towards covering the debts. Here debts include mortgages, credit card payments, loan payments and child support. Ideally, your debt to income ratio should be less than 36%.
Down payment
Another important thing which determines your eligibility to obtain the home mortgage loan is the down payment amount. As a usual practice, if your down payment amount is less than 20% of the purchase price of the house, then you are required to purchase mortgage insurance. This mortgage insurance provides additional safety to the lenders. However, with a higher down payment amount, your chance of purchasing a high priced home is increased.
Credit situation
Another important factor which determines your eligibility to obtain a home mortgage loan is your credit situation. The higher your credit score, more is your chance to obtain a home mortgage loan and vice versa.You must put in serious efforts to improve your credit score. You should not default in making payments and you must follow certain financial restraints so as to improve your credit situation.
Before offering you a home mortgage loan, lenders take into consideration the above discussed factors. However, most importantly, before taking out a home mortgage loan, you need to ensure that the mortgage loan is affordable to you. Out of excitement, you should not overbuy. This will do no good to your financial prospects and you will face difficulty in paying the mortgage loan. Before taking out a home mortgage loan, you must take the help of a home mortgage calculator. You can find out an authentic mortgage calculator through online search. A mortgage calculator will calculate your monthly mortgage payment amount. Once you get to know about your monthly payment amount, you will be able to know whether or not the mortgage loan is affordable to you. This will in turn, help you make the decision whether or not to take out a home mortgage loan.
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