There’s no doubt that one of the most important and often daunting steps in the homebuying process is qualifying for a mortgage. By understanding what lenders look for - the four C’s of credit - you can set yourself up for success and a smooth-sailing mortgage underwriting process. So, if you’re currently renting an apartment in San Francisco, looking at homes for sale in Austin, TX, or checking out another city where your money can go further, see how the four C’s of credit impacts the size of mortgage you can qualify for.
What are the four C’s of credit?
While different lenders may have their own specific qualifications for securing a home loan, there are four main factors that they’ll review and analyze during the mortgage underwriting process. These main factors are credit, capacity, capital, and collateral.
Let’s dive deeper into each of the four C’s of credit.
1) Credit
When applying for a mortgage, lenders will review your credit history and credit score to analyze your record of paying bills. They want to understand your overall history as a borrower and see how you manage your other debts and monthly payments.
Your credit score can be 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.
2) Capacity
Capacity refers to a potential borrower’s ability to repay the loan. 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) and determine if you qualify for the mortgage loan. Typically, a loan applicant with a lower DTI is viewed as lower risk, so the lower DTI, the better.
When it comes to the four C's of credit, capacity is arguably the most important and confusing areas of loan qualification. "Many borrowers get confused when it comes to the different types and sources of income a lender uses to determine their ability to repay," says Vatche Saatdjian, President and CEO of Valley West Mortgage. “These include hourly, salary, bonuses, commissioned, and self-employed. All sources of income are calculated differently with regard to qualification and depending on your current situation, can be much more or a lot less than what you might think they are. Discussing your income situation with a licensed mortgage professional is the best way to ensure success in getting approved for a home loan.”
To verify your income, lenders will review your past W2s, income tax returns, and current income statements. You can expect your income to be evaluated based on:
Then, lenders will review your monthly recurring debt payments, such as:
This is particularly important these days with surging inflation increasing the cost of just about everything, from a dozen eggs to that new furniture set you’ve been eyeing. “Before you sign on the dotted line, think about your total budget,” Behm says. “Always leave room for increased costs such as real estate taxes, utility bills, and credit card and car payments.”
Behm says new homebuyers often don’t consider unexpected costs that can quickly blow up their budget. For instance, more space likely means higher heating and cooling costs or the home you purchased could be re-assessed by the local municipality, triggering an increase in real estate taxes. “The best approach is to go with a mortgage payment you would feel comfortable with if all your other payments were to increase,” says Behm.
3) Capital
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. 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.
Beyond cash reserves, here are a few other sources of capital lenders may take into consideration:
“When going through the mortgage underwriting process, it’s important to keep in mind that liquidity is king. Having cash reserves in readily available accounts and limiting the movement of that money will help to ensure the most efficient experience,” says Nate Condon from Walkner Condon Financial Advisors.
“For example, balances in bank or credit union accounts can be easily verified and tracked using basic monthly statements. Bear in mind that any movement of money during the timeframe of the underwriting process, including a couple of months prior to it, will likely involve significant tracking. More moves mean more tracking, which can mean a lengthier process,” continues Condon.
4) Collateral
Collateral refers to the borrower's assets that can be used as security against the loan. When you're applying for a mortgage, the collateral is the home. If a borrower defaults on their 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. When a homebuyer receives financing through a bank or mortgage lender, they will order a home appraisal to determine the value of the home.
Originally published on Redfin
Things are moving so quickly in the market with the coronavirus being at the forefront, everyone is feeling hardship across the board.
FHA Loans provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. It is one of the largest insurers of mortgages in the world, insuring more than 46 million mortgages since its inception in 1934 and it's the only government agency that operates from its self-generated income.
Self-generated income which means the Mortgage insurance premiums that is collected from borrowers via lenders are used to operate the program.
FICO scores tells the lender what type of credit risk you are and what your interest rate should be to reflect that risk by utilizing a FICO formula.
The most commonalty used :
Equifax Beacon 5.0
Experian/Fair Isaac Risk Model v2
TransUnion FICO Risk Score 04
We’re seeing what’s “good” for rates can be bad for lenders, and what’s “good” for the market can be bad for home buyers. This tug of war has caused servicers to implement drastic measures to keep up; includes raising the minimum FICO. If you have questions or concerns please contact your lender right away.
Your debt to income ratio or DTI, is a figure that allows a lender to analyze your monthly spending habits. They use your DTI to determine how you manage your money.
You want your debt to income to be as low as possible to ensure that your chances of being offered a lower rate is better.
How much debt do you have this month?
Think about all of the bills you have to pay for the upcoming month.
For example, Brandi pays $720 monthly for rent, $235 monthly for her car note, $200 monthly for her car insurance, and she makes about $100 monthly in credit card and utility bills. Brandi earns $4000 every month before taxes. So if we add up Brandi’s debt expenses and divide them by 4000, we get approximately 31%.
An article from consumerfinance.gov recommends keeping your debt to income ratio below 43% based on evidence from studies on mortgage loans. So when our friend Brandi is ready to move from her apartment into a new home, the bank will be eager to get things started for her, knowing that her debt to income ratio is low and that she has the ability to repay her loan.
Another factor that can help your debt income ratio is paying your bills on time and in full. Most banks offer the option to have money from your account wired directly to the institution you wish you pay. You can even customize the time and date that the wire will be released. As a result, before applying for a mortgage loan be sure that the job you are currently holding will provide you with the means to pay your current bills and a house payment.
Higher income means more flexibility to play around with financing options. What lenders don’t want to see is that you spend six months at every job and then bail. It shows instability and lenders won’t be so open to lending their money to someone who is in the business of making risky decisions by jumping from job to job.
Be sure to use that steady job to help build your savings. Why? Because of a thing called a Cash Reserve. Your cash reserve is your safety net. Money that you have saved up between your bank accounts will be evaluated by your lender. This extra money lets the lender know that if you fall on hard times or your expenses for some reason go up, you will still have the money to pay your household bills and still make regular payments on your loan, therefore keeping your DTI constant.
What lenders typically look for is a cash reserve that will hold you over for two or more months, so be sure to pad those savings accounts.
A meaningful proportion of current student loan borrowers will likely be flirting with a risky DTI just from student loan debt. 16% of Student Loan Borrowers Will Likely Have a DTI Over 20% Just From Student Loans. Below shows sample data from Lendedu: 10,000 pre-qualification applicants used.
The above statistics derive from proprietary data provided to LendEDU by student loan lender Funding U. DTI ratios for nearly 10,000 pre-qualification applications for private student loans were calculated by Funding U using metrics like projected first year salary, projected student loan debt upon graduating, and projected monthly student loan debt payments
Debt to income is an important factor when applying for a home loan. Be sure to take this critical component into consideration when you go to speak with your lender.
Buying a house is not something you should do without some good financial knowledge and advice. Your first mortgage should be thoroughly thought out and well planned. Now that you’re thinking of purchasing a home, use the next 12-18 months or so to prepare yourself.
Houses are not cheap. In order to pay for one, you’ll have to get a home loan and pay it off in monthly installments. How much you’ll have to pay is dependent upon your mortgage lender and your credit score. You credit can take a while to build and even longer to repair if it’s damaged, so start working on it early. See an article by Megan Ortiz on how to Establish, Raise, and Maintain your credit score HERE . Get into the habit of paying everything on time even if it doesn’t go on your credit report. Make a detailed list or a spreadsheet of all of your financial responsibilities from utility bills to student loans. If you practice good habits, eventually they will become second nature. Be meticulous about getting things paid on time or early if you can. Practice makes perfect.
Loan officers are going to calculate your debt to income ratio, so the less debt you have the better. Things like car notes and credit card payments will be looked at and taken into consideration before a lender will agree to give you a loan. If the total amount of the debt you already have plus the debt you will have after being given a home loan will exceed 43% of your total income, you’re going to have a tough time getting someone to lend to you. So be sure to calculate your debt and pay it down to the lowest amount possible.
Before even looking at homes, it’s a good idea to sit down and chit chat with a loan officer. Let him or her know your intentions, what kind of home you wish to buy and how much you’re willing to spend. He should be able to run some numbers for you and give you a breakdown of how much you can afford and how much his company would be willing to lend to you, including rates and such.You want to feel comfortable doing business with your chosen mortgage company so ask as many questions as necessary. Any loan officer that isn’t willing to take his time with you and answer your questions isn’t worth your time.
Start keeping your tax returns, pay stubs, and banks statements in a safe and secure place. In this digital age, it’s easy to order your financial documents from the IRS or from your bank, so be sure to acquire and retain a few copies somewhere at home, as these are documents that you will have to provide to your mortgage company when they are processing your loan.
As we all know, getting a new home is exciting and I’m sure you’ll be busting at the seams with new decorative ideas for your home. However, keep in mind the hefty amounts of money that have to be spent just to purchase the home (closing costs, down payments, etc.). Don’t go spending all of your extra money, preparing for a new home and then end up without a home to put all of your stuff in because your credit report came back indicating that you don’t know how to handle money.
In order to qualify for a loan, you must have a solid work history. The reason why? Because no one is going to want to lend to you if they don’t know that you have the means to repay them. Having a job is good, keeping a job is even better. Another thing is the type of pay you receive. If you’re on salary where you work, you’re more than likely in a career based job, which means you’ve probably been in your position for a while and you aren’t likely to leave that company any time soon. If you’re on an hourly job, and you haven’t been there for a solid 18-24 months you may have a harder time convincing your loan officer that you aren’t going to default on your loan.
The biggest tip that I can give you is to be prepared. Acquiring a new home is a big step, and it’s not one that should be taken lightly. If you aren’t financially ready to buy a new home, take these few steps to get yourself ready. There is nothing more joyous than owning your own home, you deserve it!
WHITNEY RUSH, VALLEY WEST MORTGAGE
An amount that you borrow and agree to repay under specific terms.
Usually a formal agreement, loans involve two parties: the borrower and the lender.
The contract specifies the terms and conditions of the loan, and once you sign, you are legally obligated to adhere to it.
Before pursuing and taking out a loan, learn how they work and how you can borrow smartly, safely and at the lowest possible cost.
These are the essentials on how loans work:
There are two basic types of loans: secured and unsecured.
Secured loans are collateralize by money in a separate account, the property you purchase or other assets, such as your home or vehicle. If you don't repay as agreed, the lender can claim the collateral to pay off the debt. Because of this guarantee, the lender's level of risk is low.
Common loan types include:
Some types of loans are more involved than others. For example, you may have to submit extensive paperwork in underwriting for mortgages or business loans. But the overall process is fairly consistent with all loan types.
Applying: Some lenders offer prequalification or preapproval, but to actually obtain a loan, you'll ultimately need to fill out an application. A loan application will ask for personal information, typically your name, date of birth, Social Security number, address, phone number and email address. You'll typically need to include income and employment details. Some loan types may require details about your assets (cash in savings and investment accounts, as well as any property) and liabilities (your financial obligations).
Qualifying: Once your application is received, the lender will assess it for approval. This is also known as underwriting. With most loans, this is when a lender will check your credit report and score. At this point, the lender will decide whether you're approved for the loan and if so, what terms you qualify for, such as the loan amount and annual percentage rate. For some loans, like mortgages, loan processing and underwriting may include appraisal, inspection and other steps to gather more information about the property or your financial status.
Disbursement: If you qualify for the loan, the funds will be disbursed to you or a designated recipient, such as a title company for mortgages. Disbursement may also be referred to as loan closing. Disbursement time can vary widely depending on loan type and individual lenders. Online lenders may offer access to funds within 24 hours with an electronic deposit. Disbursement for other loans can take longer. For example, it can take two weeks to two months for a private student loan to be sent to you or your college. Whenever and wherever the money lands, it becomes your debt once it's disbursed.
Paying the balance: The payment amount and due date will be listed on the agreement you signed. A portion of your payment will go toward financing, and the rest will be applied to the principal. If the lender uses the simple interest method, interest will be calculated on the outstanding balance due. If you increase the payment, interest fees will decrease along with your debt. On the other hand, if the lender computes interest prior to, the interest for the term of the loan is already factored in, so you won't reduce interest if you pay the loan early.
The lender may report activity on the loan to the three credit reporting agencies: Experian, TransUnion and Equifax. Paying on time can improve your credit rating and save you money by avoiding late fees.
Refinancing: You might want to change your loan's terms at some point – for example, getting a lower interest rate or extending your loan's repayment term. Refinancing is essentially getting a new loan to pay off an older one, ideally with better terms.
Remember that, as a borrower, you have the power to choose which loan type works best for you. Research the best terms that you can qualify for, then borrow prudently.
Looking to purchase a home? Give Us A Call Today! (702) 696-9900 or (888) 931-9444
Resource: U.S.News
Buying a home can be a challenging experience for first-timers. Here are some mortgage tips to help get you started.
It's quite common to put 20% down, but many lenders will now permit a much lesser percentage, and first-time buyers programs allow as little as 3% down. Putting down less than 20% could mean higher costs and paying for mortgage insurance, even a small down payment amount can still be hefty.
Check out the various loan programs:
Loan Terms:
Making a much higher down payment will mean having a lower monthly mortgage payment.
Many states offer assistance programs for first-time home buyers with perks such as down payment assistance, closing cost assistance, tax credits and discounted interest rates.
You will need to now what's actually within your price range. Find your debt-to-income.
Your credit score (FICO) will be one of the key factors in whether you're approved, and it will help determine your interest rate and loan terms. Speak to an expert about any disputes you may have on your report.
We recommend comparing at least 3 lenders before making a decision. This could save you more money.
As you get closer to buying a home, it’s smart to get a preapproval, where the lender thoroughly examines your finances and confirms in writing how much it's willing to lend you, and under what terms. Having a preapproval letter in hand makes you look much more serious to a seller and can give you an upper hand over buyers who haven’t taken this step.
In a competitive real estate market with limited inventory, it’s likely you’ll bid on houses that get multiple offers so having a preapproval letter will increase your purchasing power.
We all know things happen that are out of our control. An unexpected medical bill or a car emergency. These types of situations can throw off your whole budget and cause you to worry about missing a mortgage payment or several payments. Do you know what to do?
Always be prepared to tell the why you can't make your monthly payments and whether or not this is temporary or permanent and also provide them with other details about your income expenses. In some cases, your mortgage servicer may have programs in place to help you avoid that dreadful word, foreclosure.
It's free and can help you find a counselor near you. They can assist to help you figure out if you qualify for help and help you further understand any assistance your mortgage company may have offered you.
In general, not paying your mortgage will be reported by your lender to the three major credit bureaus and they will lower your credit score. In addition, after a grace period (generally a week to 15 days after the payment due date), a late fee will be added on to the payment you failed to make.**
When you're going through a situation like this, it is imperative to watch out for scams. Never pay anyone to help you to avoid foreclosure. They might tell you they'll save your home foreclosure when they're really just taking your money.
If and when this ever happens make sure you're in contact with your mortgage servicer. They're more likely to work with you if you let them know before you miss a payment.some lenders being willing to offer informal forgiveness or being willing to hold off on late fees or reporting to credit agencies, in some cases people can qualify for forbearance programs. These are formal programs where people facing financial problems can miss a payment or make a lower payment for a period of time while they sort out financial problems.**
* Servicer- The company you make your payments to.
**Depends on the mortgage servicers discretion.
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