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Because of the state of the economy, lenders have become increasingly picky when it comes to loan approval. Therefore, making a good impression will make everything easier. Even borrowers with good credit and a steady job need to “wow” their lenders. Here are some things lenders look for.
“The four Cs.” Instead of a high income or spotless credit alone, lenders look for strength in four different areas, summed up by four Cs.
Capacity: The borrower’s income compared to the interest and principal due on the loan. Plus, it refers to the ability to cover property taxes, homeowners insurance, and any additional costs that arise out of owning a home.
Character: The borrower’s history of paying debts; basically, their credit history and score.
Capital: The borrower’s down payment or equity, usually a percentage of the total value of the home—the higher the better.
Collateral: The borrower’s value of the home, the safety and soundness of the investment as determined by an appraisal relative to the purchase price.
If you are strong in all four areas, lenders will find it very difficult to reject your loan application. If you are strong in three areas, the loan has a good chance of being approved. Two areas only, it probably will not. Also of note is if you have a down payment of less than 20% of the home’s value, mortgage insurers will get involved; they have a completely different set of standards than the banks do. Borrowers in this situation need to discuss their options with a loan officer or someone who is familiar with insurers’ guidelines.
Once you have the “Four Cs” in order, you need to now think of the next step. This being: have your paperwork in order.
It would be nice if lenders relied on the say-so of the borrower alone. Obviously, this is not the case. At the least, the borrower needs to have the following.
–One month of paycheque stubs.
–Two years of W-2 forms.
–Three months of bank account statements.
Keep in mind: these three items are the minimum. Additional paperwork will be asked for if:
–You’re self employed or earn 25% of your income due to commission or bonuses. If so, you’ll need to submit two years of income tax information.
–If you are divorced, the lender will want to know how much alimony or child-support you are required to pay; adversely, how much you are entitled to receive and the duration of these payments.
–If you have filed for bankruptcy within seven years, you will need to show these papers.
–If you have deferred payment of student loans, you should provide your deferral agreement.
If the repayment is going to be deferred for at least twelve months, the case for approval will be strengthened. If so, you will want to have the account numbers for these loans handy. Keep in mind, student loans are counted as dept, but deferral of payment will help your case.
Once you can prove strength in “the Four Cs,” your paper work is in order, and you have applied for a loan, do not make any major changes to your financial situation. For examples, read these following points.
–Do not increase your debt. The biggest error borrowers make is they become pre-approved for their mortgage, they get excited, then they buy new furniture, cars, TVs, etc. This increases their debt. And since credit is often rerun before closing, their additional debt causes them to be disqualified.
–Do not open new credit accounts. If you transfer money to a new zero-interest card, your FICO score will drop because you have more credit all of a sudden. Do not do this.
–Do not challenge a request for more documents. You may think “Hey, I’ve read ‘How to Prepare for Your Lender,’ and they didn’t mention form so-and-so.” So? Refusing to hand over documentation causes suspicion in the lender. Hand over as much documentation as possible and know that pre-verification is often pointless because the lender’s process will uncover any financial truths you have attempted to hide.
–Do not float your interest rate unless you can afford higher payments. Higher payments will change your debt-to-income ratio (the first “C”), and this could prevent you from qualifying for the loan you have applied for.
–Do not change your employment. Right before closing, every lender will verify that you still have the same job. A job change is less likely to ruin your loan if you stay in the same industry. And, if you do change, expect to earn as much and do not have a gap between jobs.
–Do not delay payment of your bills or rent. You may think “Hey, I have a home now, so I do not care if the landlord gets angry.” This is wrong. Most lenders will check with your landlord to verify that you, indeed, pay your bills on time. This shows them your reliability.
–Do not skip your mortgage payment. Some homeowners do not bother to make their last mortgage payment because they believe that the loan will be paid off when they sell their current home or refinance the loan. This is another mistake. A late payment can ruin your credit score.
–Do not overextend yourself. If your current monthly rent is 1000$ and your new monthly mortgage payment is 3000$, this is a huge adjustment. Your loan is more likely to be approved if the increase is smaller.
With these in mind, you will have no problem being approved for your mortgage.