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What Lenders Consider Before Approving You for a Mortgage When you apply for a mortgage, you are basically using your land or house as collateral for the loan. However, lenders are usually not interested in taking your house. Lenders want borrowers to be able to pay the monthly installments. This is why lenders will usually carry out a financial background check on you prior to approving a mortgage. 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: Down Payment for the Loan Majority of lenders will require you to put down about 20 percent of the value of the mortgage you would like to apply for. However, keep in mind that there are different types of mortgages available. Thus, you can find mortgages where the down payment required is less. However, if offer a lower down payment, the lender will scrutinize your finances even more. By providing a down payment, you are committing yourself to paying off the mortgage. You can walk away from a mortgage deal and not incur a huge loss if you did not provide a large down payment. As a result, the mortgage lender will be the one to incur the largest loss.
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Some lenders can approve you for a mortgage if you cannot raise 20 percent down payment but can provide private mortgage insurance (PMI). In case you stop paying the mortgage, the PMI will protect the lender from incurring huge losses. There are also a number of mortgages that do not require borrowers to provide PMI. For example, mortgages meant for members of the military and their families usually do not come with a PMI requirement.
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How Much Debt Do You Have? Another important thing that lenders consider is the amount of debt you have. 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. Credit cards, student loans, alimony and child support are some of the expenses the lender will want to know about. 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. What is Your Credit Score? The lender will also check your credit score to determine how much mortgage to offer. From your credits score, the lender will determine whether you are a low risk or high risk borrower.