With the real estate market moving quickly, many of us are focusing on interest rates and rising home prices. I thought it would be good a good idea to get back to the fundamentals of mortgages to ensure you put yourself in the best position as you prepare to purchase a home.
So often I hear, “we never learned that in school!” I wrote this article to provide the information you need to set yourself up for success.
No matter the market, lenders will always rely on the 4 C’s of mortgage as we process your file for approval.
In the following section, I’ll introduce each “C,” explain how it relates to you and why it is important.
Are you ready to talk about mortgages and get the process started? Book time on my calendar to schedule a consultation!
Credit: Your credit score matters, handle it with care. Your credit score represents your history
of payments with previous creditors. The score tells the lender if you have been responsible
with other people’s money. Aim to get and keep your score as high as possible. A higher credit
score represents less risk, and less risk gives you access to better interest rates. I’ll write it
again so it hits home – your credit score matters, handle it with care.
What this means for you – Take care of your credit! Here are three things to keep in mind as you’re using credit.
Pay your bills on time
Use 30% or less of the available balance
Treat federal debt with the utmost care – pay student loans and taxes. Make arrangements if you need to, but keep these debts in good standing.
Capital: Capital refers to the cash you have on hand. This cash can be applied to your
purchase in a number of ways. It can be viewed as reserve funds, meaning money in your
coffers after you close on the loan ensuring you’ll be able to continue payments, it can be
viewed as capital for the down payment and closing costs as well.
What this means for you – As you make money, save money. Put money into an account that you do not touch and let it accumulate. Earmark this money for your home purchase. Here are three things to keep in mind as you save your money.
Make sure all money deposited into the account can be “sourced,” meaning if a lender needs to follow the trail of how this money got to you, they can.
Depending on the loan you qualify for, plan to have money for the down payment, which can be from 3% – 20% of the purchase price, and closing costs which can range from 3% – 6% of the purchase price.
A rule of thumb is to have two months of bank statements to share with the lender. Make sure you can access the statements to provide if needed.
Collateral: This “C” represents the home you are using the loan to purchase. The lender will order an appraisal to determine if the home value is equal to or more than the loan amount.This is to ensure that both the buyer and the lender are financing a property that is valued at the amount the seller says it is. How does the appraisal protect both parties? The appraisal ensures you’re not overpaying. The appraisal also ensures that in the event you stop paying the loan, the lender will be able to sell the property to recoup the money they loaned to you.
What this means for you – The home needs to appraise. If you purchase a home for $100,000 and it appraises for $50,000 the lender will lend you $50,000 because that is the home’s value. When the home comes in under appraisal, you, the buyer, will be responsible for the difference.When the home appraises, meaning the home appraisal says the value of the home is equal to or more than the loan amount, you can move forward with the loan as normal. Here are three things to keep in mind during the appraisal process.
The lender will order the appraisal.
You, the buyer, will pay for the appraisal and the amount will be credited at closing.
This step is mandatory. If you are financing your home you must get an appraisal.
Capacity: Capacity relates to the distribution of your income, and your ability to repay. How much your income already allocated to debt payments? How much can be allocated toward a mortgage? Lenders will use a predetermined guideline that establishes how much of your income can be used toward debt and mortgage payments. Want to know what this calculation is? Book time on my calendar to schedule a consultation.
What this means for you – How you use the money you earn matters. Your ability to repay
directly impacts your preapproval amount. Here are three things to keep in mind when you’re thinking about capacity.
Your debt to income ratio directly impacts the amount of your preapproval.
Be mindful of accumulating new debt and how it will impact your ratio.
Strategically pay down/off debt to impact your ratios.
I hope you find the home you’re looking for, I’d love to help you find the loan you need to buy it.
By: Kaysha Cranon