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By Doreen Martel

What you need to know about mortgage financing

The American Dream: home ownership. Chances are many consumers are uncertain as to what the requirements are to secure a mortgage, how to apply for mortgage financing or what the benefits are of having a home mortgage. We'll attempt to address these questions and help you get started.

Requirements to secure a home mortgage

Whether a potential home buyer is just starting the house hunting process or has already found the perfect home, they need to have an understanding of the requirements for securing a mortgage. For most borrowers, saving a down payment is the first step in securing the mortgage they are looking for. Other requirements include the following:

  • Work history – The better the work history, the higher the chances of securing the mortgage a consumer wants. Lenders measure their risk before providing loans for new homes, and someone who has an erratic work history may not be considered a good risk.
  • Credit history – Before a potential homeowner starts searching for financing, they should ensure their credit report does not contain any errors. By law, consumers are allowed to request a free credit report from each of the three reporting agencies on an annual basis. Any errors should be addressed before applying for a home mortgage.
  • Reserve funds – Many lenders require a new homeowner to have three to six months' reserve funds in the event of a job layoff or other financial setback. Borrowers may check with the lender to determine if they have reserve requirements.

Applying for mortgage financing

Once a potential homeowner has identified a property, they will sign a purchase and sale agreement with the seller. One clause a buyer should look for in these contracts is a contingency clause stating that the buyer must be able to secure appropriate financing. Once the agreement is signed, a mortgage broker or lender will ask the borrower to fill out a Form 1003, which is a standard mortgage application. This must be provided along with numerous documents including the following:

  • Tax returns – Most lenders will ask for a minimum of three years' tax returns.
  • Pay stubs – Lenders will require borrowers to provide proof of income, which may include their last four pay stubs.
  • Debts and assets – Lenders will ask borrowers to provide proof of other debts and assets to determine the borrower's ability repay their loan.
  • Proof of down payment – Mortgage lenders will ask the borrower to provide proof of their down payment and, in many cases, the source of those funds.

Benefits of a mortgage

Borrowers who make a down payment of less than 20 percent of the cost of the home will be required to pay for private mortgage insurance (PMI). In addition, borrowers are often required to pay points and certain closing costs. Many of these costs are deductible on their taxes. Additionally, monthly mortgage payments consist of both interest and principal payments and for most borrowers, the interest portion of their payments can help reduce their tax burden.

Purchasing a home is exciting and there are hundreds of resources available from Fannie Mae and other agencies to help a new homeowner get started. Taking the time to accumulate a down payment, verifying accuracy of credit reporting and having a strong work history are all important to being approved for a home mortgage.

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