We’re getting into home-buying season and with that many questions about financing a home. Let’s look at the 3 C’s a lender looks at in the mortgage approval process and a couple of little known facts tossed into the mix as well…
Interesting fact: In Scotland, did you know, a red front door signifies the owners have paid off their mortgage? Reason to celebrate, for sure! But in the meantime, most of us can’t afford to buy a home with all cash and no loan…
If that’s you, here’s the 3 C’s that need to be in place to qualify to finance the purchase of a home:
CREDIT – Do you pay as promised?
Lenders utilize credit scores and credit history to estimate a borrower’s estimated risk of default based on their past credit patterns. The higher the credit score, the better chance of getting approved and getting a lower interest rate. I’d start by getting your free credit report – you’re allowed to get one every year from the big 3 reporting agencies. Go to www.annualcreditreport.com This is a good place to start to check for mistakes, collection accounts, or evidence of ID Theft. In fact, you’re entitled to do it every year and whether you need a loan or not, you should be checking to make sure that everything is correct. I check mine in December or January and have been doing it for years.
Credit scores: There are multiple models and credit scoring, but generally 750 and greater is going to be the most favorable score. Factors that influence the score are from most important: your payment history, the amounts owed, length of your credit history, credit mix (retail accounts, credit cards, installments (such as a car), finance company, and mortgage, and new credit and inquiries.
Interesting fact: Sometimes a credit report will reveal negative items such as collection accounts, liens, or erroneous data. While individuals may have success clearing up these items themselves, sometimes it pays to have companies that specialize in credit repair to help clear it quicker. Not all companies are legit – It’s best to find one through a reputable lender. Ask me. I’ll be happy to direct you to a reputable lender.
CAPACITY – Do you have the ability to repay the loan?
This is where you need to prove that you have the financial ability to payback your home loan. If you’re an employee receiving a W2, that tends to be the most stable of incomes and easier to verify. Self-employed folks are considered riskier and get more scrutiny in the application process. While the tax code is generous about allowing business owners to deduct their expenses, 1099 or self-employed individuals who want to qualify to finance a home need to show income enough on their tax return to qualify to purchase for two full years! So if you’re leaving an employer as a W2 employee, you might want to consider getting a loan or doing a refinance before you leave!
Interesting fact: Some borrowers don’t have a regular income. They may be retired, but they can still qualify though their ability to repay is based on other assets (maybe retirement assets?) The method is called Asset Dissipation which creates a monthly income from the assets. Not all lenders offer programs for these buyers. If you need one, ask me. I work with credible lenders who offer these types of programs.
When proving you have the ability to repay, you also will be scrutinized for the amount of debt you’re obligated to pay back including student loans. Consider paying off as much debt as comfortably possibly before you apply for a loan. Doing so will do a couple of things for you: lower your debt-to-income ratio making it easier to qualify and it likely will increase your credit score.
COLLATERAL: What secures the lender’s interest in the loan?
The home you purchase will serve as collateral for your mortgage. That’s why the lender will want to appraise the property to ensure that if something happens to you or your ability to pay, they have an asset that they can sell and recoup all or a good portion of their investment. An appraisal seeks to identify the value, type, quality, and condition of the property.
I work with great lenders who will help you every step of the way. Let’s chat and let me help you reach your real estate goals this year!