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Getting Approved for a Mortgage The way a mortgage works is that it is basically a loan approved when you offer your house as collateral. However, inasmuch as the house is the collateral, the lenders are usually not interested in it. 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. This is done to determine the risk of lending to you. To determine whether or not to approve you for a loan, the lender will consider the following: How Much Down Payment Are You Offering? Generally, lenders require borrowers to provide at least 20 percent of the value of the home as down payment. However, keep in mind that there are different types of mortgages available. You can also find mortgages where you are not required to pay 20 percent as down payment. However, your financial background will be scrutinized more if you choose to offer a lower down payment. Lenders take the down payment you provide acts as your commitment to paying the mortgage. If you put a smaller down payment, you can easily walk away from the payments without incurring a huge loss. As a result, the mortgage lender will be the one to incur the largest loss.
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If you cannot provide a 20 percent down payment for the mortgage, the lender may require you to provide private mortgage insurance (PMI) to be approved for a mortgage. In case you stop paying the mortgage, the PMI will protect the lender from incurring huge losses. You can also apply for different mortgages that do not require insurance. A good example of such mortgages are those tailored of members of the military and their families.
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Amount of Debt You Currently Have Your approval for a mortgage will also depend on your current recurring expenses. In the financial world, 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. You may find it difficult to pay back the mortgage if your recurring monthly expenses are more than 30 percent of the gross income. What is Your Credit Score? Your credit score will also be checked so that the lender can know how much mortgage to offer. The lender will classify you as either a high risk or low risk borrower, depending on your credit score.