Categories of Ratios That Will Affect Your Mortgage Application and Loan Amount

mortgage application form

Almost all potential homeowners require a mortgage to fund the purchase of their dream home. Getting a mortgage is one of the most significant decisions you will make in life. There are many lenders you will come across when shopping for a home loan to fund your purchase.

Specific ratios affect the outcome of your mortgage application. Your loan officer in Jackson, TN, will explain these well when you apply for your home loan. Here are a few of these ratios.

Debt-to-Income Ratio

Mortgage lenders use debt-to-income ratios to determine how much cash you can afford to pay in mortgage according to your income. They calculate the ratio as a percentage of your monthly gross income vis-à-vis your debt load every month.

To qualify for a higher mortgage, you can consider paying off all or most of your existing loans before applying for a home loan.

Loan-to-Value Ratio

Mortgage lenders calculate your loan-to-value ratio by dividing your home loan by your home’s appraised worth. A low ratio attracts a lower interest rate since the lender views you like a less risky borrower compared with those with a high ratio.

High loan-to-value ratios attract strict qualification guidelines and high insurance to protect the lender from a loan default.

Cost-to-Income Ratio

Mortgage costs you a lot to maintain. Apart from the monthly principal payments and interests that you pay for your home loan, there are other costs. These include insurance and taxes among other fees. Most lenders will advise you to get a lower mortgage if your loan’s cost exceeds 25% of your income.

Before applying for a mortgage, save up cash for your down payment. If you can put down a sizable amount, you become an attractive borrower and increase your chances of acceptance. Most lenders also offer extra incentives for clients with substantial down payments.