You can use a mortgage to purchase a new home, an investment property or to take equity from your existing home. Loan products vary greatly between lenders. Your ability to obtain a mortgage depends on a variety of factors that include your income, credit history and your cash reserves.
When you submit a mortgage application, your lender checks your credit score. Low scores are indicative of people who have a bad track record of repaying debts. Foreclosures, bankruptcies and even car repossessions can harm your credit score to the extent that you may find yourself unable to obtain a mortgage for several years until you have rebuilt your credit score. Credit minimums are less stringent for Federal Housing Administration-backed loans, but even on these, your loan amount cannot exceed 90 percent of the property value if your credit score falls below 580.
Generally, lenders require you to make a down payment when you take out a purchase mortgage. Depending on the loan program, down payments vary in size between 3.5 and 30 percent of the purchase price. On cash-out refinance loans, you can normally only finance up to 80 percent of your home's market value. You must provide your lender with copies of bank and brokerage statements to prove that you have cash on hand to cover the down payment and the closing costs. You cannot buy a $300,000 loan with a loan that requires a 20 percent down payment if you only have $40,000 in the bank. Therefore, your cash reserves can limit your loan amount.
You can normally only get a mortgage if you have demonstrated your ability to repay the debt. Your lender compares your obligations as listed on your credit report with your income. Your mortgage payment cannot exceed a certain percentage of your gross monthly income and lenders refer to this calculation as your front-end ratio. Additionally, lenders also limit your total debt payments as a percentage of your income and lenders refer to this as a back-end, or debt-to-income ratio. The FHA caps front-end ratios at between 31 and 33 percent, while back-end ratios are capped at between 41 and 45 percent.
Your choice of collateral has an impact on your loan amount. Your loan amount cannot exceed the property's market value. This means you can potentially get a larger loan if you buy a more expensive house. However, factors such as falling home prices and a glut of certain types of property can cause lenders to limit lending in some areas. Regardless of your credit and income, a lender may limit your loan amount if the property than you intend to finance seems likely to plummet in value.
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