As a prospective homeowner, you stand ready to pay hundreds of thousands of dollars in interest expenses over the span of a mortgage loan. On the other side of the deal, the bank is poised to collect thousands of dollars in annual interest income. The mortgage underwriting procedure provides for your entrance into the real estate market, while also allowing the bank to turn a fair profit.
Identification
A mortgage is a sort of secured loan that’s backed by real estate security. The mortgage contract grants permission for your bank to foreclose on your house and auction it off to make good on missed payments. To protect its financial interests, the bank will conduct an assessment of your home within the mortgage underwriting procedure. Do not expect the bank to approve a mortgage principal amount that exceeds the home’s first assessed value.
Characteristics
Mortgage underwriting helps to ascertain your likelihood for making timely payments on an approved principal balance. In turn, the bank needs interest payments as compensation for exposing itself to monetary losses. CNNMoney.com asserts an affordable monthly mortgage payment drops between 28 and 33% of your gross earnings. Having a gross income of $7,000 per month, you can expect to be eligible for a mortgage that has a monthly charge of $1,960–or 28 percent of your yearly earnings. Investopedia claims your debt-income ratio can be taken into account and should fall under 36 percent. Thus, your overall monthly mortgage, credit card, personal loan and car note payments shouldn’t exceed 36 percent of your yearly earnings. Don’t forget to include escrow account deposits for private mortgage insurance and property taxes on your monthly obligations.
Documentation
The underwriter is going to have you regain supporting paperwork to document claims made on your mortgage application. Important documentation incorporates recent pay stubs, bank statements and tax returns. Your credit report and FICO score are especially important, as they help the bank to evaluate your capability to handle debt. According to Bankrate.com, you need a minimum FICO score of 500 to be qualified for a mortgage loan. The website also reports that a FICO score over 760 allows you to negotiate the lowest mortgage prices.
Plan
You will commit to creating a large deposit on the house to improve your chances for securing mortgage approval on good terms. If you can, you need to put down 20 percent of the property’s purchase price in cash. As stated by the Federal Reserve Bank of San Francisco, you’d subsequently reevaluate requirements to buy private mortgage insurance coverage through your mortgage contract.
Warning
The Federal Bureau of Investigation alarms consumers against fraud. Mortgage fraud describes tactics where you and a bank representative misstate income, assets and credit so as to forge mortgage approval. Mortgage fraud increases your chance of foreclosure, since the procedure could cause an unaffordable monthly payment. Additionally, you may be subject to jail time if convicted of fraud.