Published Date 5/24/2022
With interest rates on the rise, home prices not taking a nosedive anytime soon, and a painfully low inventory of homes available to those not paying cash and looking to buy, qualifying for a loan means balancing a number of factors in order to get a loan pre-approval, enabling you to make an offer.
Redfin’s Mekaila Oaks explains how one of the most important and often daunting steps in the home buying process means understanding what lenders look for – the four C’s. Those are (1) Credit — having a track record of consistently making payments on time and across the board, (2) Capacity — lenders need to feel in no uncertain terms that you have the wherewithal to repay the loan, (3) Capital —this includes assets, cash reserves and other funds at your disposal, and (4) Collateral —what is being used as security against the mortgage loan? What property or possessions can you pledge as security against the loan?
Credit history and credit score are the first things lenders look at. They analyze your record of paying bills in an attempt to understand your overall history as a borrower and see how you manage your other debts and monthly payments. The credit score is an earned number — a make or break factor for a mortgage loan approval. “Oftentimes, there will be minimum credit score requirements for a mortgage, and your credit score may determine the size of the loan amount you’re qualified for in addition to the interest rate on the loan,” says Oaks.
Borrowers may not be aware that the data on a credit report may be up to two months old. Knowing that, it’s wise to get an early start if you are planning to pay down credit card balances or plan to pay off any current loans. Getting a jump on it means lenders will see that some of these accounts are being paid off or down, perhaps convincing them that your credit score is on the rise. If you haven’t earned that magic number your loan consultant says the lenders need to see, he or she will no doubt advise you to work on improving it as much and as soon as possible. That may mean reducing any high balances on your cards and keeping the cards’ balances below 30% of the available credit limits. Oaks suggests that if you use your credit card for convenience and typically pay it off each month in full, don’t wait for the statement to come out, then pay. Rather, pay the card down before the statement actually comes out.
The second C, capacity, means a lender will look at your income, savings, employment status and history, and any other financial obligations (such as a car loan, student loans, etc.) to assess your debt-to-income ratio (DTI) to determine if you qualify for the mortgage loan. The lower the DTI, the lower the risk to the lender. Of all the Cs, capacity is arguably the most important as well as confusing areas of loan qualification, as the different types and sources of income a lender uses to determine their ability to repay are all over the map. We’re talking hourly, salary, bonuses, commissioned, and self-employed, and all sources of income are calculated differently depending on various factors. Discussing all this with a licensed mortgage professional is the best way to ensure success in getting approved for a home loan, because they have seen everything. They’ll review your past W2s, income tax returns, and current income statements and will scrutinize recurring debt payments such as auto loans, student loans, any personal loans, credit card payments or line of credit payments, as well as other debts and obligations such as child or spousal support payments and medical bills. Lenders take into consideration that if you are in a borderline qualifying situation, they will be aware of added costs due to inflation, real estate taxes, utility bills, and credit card and car payments, you’ll need room in your budget beyond your monthly mortgage payment. It’s best to look at your worst case scenario, just in case your financial obligations increase.
Are you a saver or a risk taker? “In addition to your income, lenders look to see how much money you have in savings and in investment accounts that can be converted to cash, such as stocks, 401(k) account(s), or Individual Retirement Accounts (known as IRAs) – which are referred to as cash reserves,” say Oaks. “Lenders want to see that you have funds beyond your gross monthly income for your mortgage payment as well as for your down payment and closing costs.” She goes on to say that beyond cash reserves, you may consider some options, such as down payment assistance programs, gifts from relatives, or grants. Liquidity is always king, so having cash reserves in readily available accounts and limiting the movement of that money will help to ensure the most efficient experience.
The last of the four Cs is collateral. It refers to any of your assets that can be used as security against the loan — in most cases it’s the house itself. If you default on your mortgage loan, the mortgage company or bank can take possession of the home. “Collateral is often measured by its value and perceived ease of liquidation,” says Oaks, who says that value is determined by the appraisal.
Redfin, TBWS
All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.
First
Priority Home Loans is a DBA of Anchor Funding, Inc. NMLS #236419 &
1626581. California
Bureau of Real Estate,
Real
Estate Broker Number 01276087. Loans made or arranged pursuant
to the
California Department of Business Oversight. California Finance Lenders Law
license number 603 L293.
NMLS: 220937
First Priority Home Loans
891 Kuhn Drive #204, Chula Vista CA
Company NMLS: 236419
Office: 619-323-2066
Cell: 619-208-6499
Email: andrefunds4u@sbcglobal.net
NMLS: 220937
Cell: 619-208-6499
3/28/2024
They say what goes up must come down. Buying, rehabbing, and reselling homes for... view more
3/28/2024
The March bellwether Chicago PMI cratered down to 41.4 versus estimates of 46.0.... view more
3/27/2024
Markets started the day fractionally better, the 10 year note at 8 am ET 4.22% -... view more
3/26/2024
Water pressure is a big deal. Where we want it most, however, is in our homes, s... view more
3/25/2024
While agents are still sorting out what all this means for their business, the m... view more
3/25/2024
These are the three areas that have the greatest ability to impact rates this we... view more
3/22/2024
Instagram can be a great place to gather decor ideas, and the ones...... view more
3/21/2024
In a perfect world, we could press a button and our house would be clean. Unfort... view more