Whether you're buying a home or refinancing an existing home loan, you'll soon find out that lenders today are a picky and demanding bunch when it comes to loan approvals. Even well-qualified borrowers are expected to jump through some pretty high hoops to qualify for financing.
But fear not: These tips and suggestions can help you make the best possible impression on the lender of your choice.
Just as job-hunters may wonder what top employers want to see on a resume, prospective borrowers may be curious about what lenders look for on a loan
The answer may be summed up with a mnemonic called "The four C's," according to Greg Gwizdz, national sales manager for Wells Fargo Home Mortgage in Des Moines, Iowa.
The four C's:
Capacity, which refers to the adequacy of the borrower's income to pay the interest and principal due on the loan, plus property taxes and homeowners insurance.
Character, which refers to the borrower's track record of paying debts as evidenced by his or her credit history and credit score.
Capital, which refers to the borrower's down payment (or equity) as a percentage of the current value of the home.
Collateral, which refers to the safety and soundness of the home and the value of the home as determined by an appraisal relative to the agreed-upon purchase price.
Mike Mueller, a mortgage broker with Patagonia Finance in San Francisco, uses a quadrant with "income," "credit," "assets" and "property" in the four corners, but his point is the same as the four C's: Neither a high income nor an exemplary credit report alone is enough to make your loan application stand out. What lenders like to see is strength and stability in all of the four corners.
"If you're strong in all four corners, you're on a chair," Mueller says. "That's pretty stable. In theory, I can take away one of the corners -- maybe your credit score has some dings or you need a stated-income loan -- but the other corners are still pretty solid, so you have a tripod. That's not as stable as a chair, but it will still stand up. If you take away another corner, you have a ladder. Ladders don't work anymore."
Borrowers who are qualified, but whose down payment will be less than 20 percent of the purchase price of the home, must withstand a second level of scrutiny. That's because mortgage insurers also have to approve such loans, and they have "completely different qualification ratios," Mueller says. Borrowers in this situation should discuss their options with a loan officer who is familiar with lenders' and insurers' guidelines.
A Pile Of Paperwork
Lenders rely not on the borrower's say-so, but on a pile of paperwork to verify and document the borrower's financial position. At a minimum, most borrowers are required to submit the following:
One month of paycheck stubs.
Two years of W-2 forms.
Three months of bank account statements.
Note that this is just the minimum amount of paperwork required. Many times there is more paperwork that is needed to complete the loan process.
Well-qualified borrowers can still knock themselves out of the loan process if they violate certain rules, the most important of which is: Don't make any substantive changes to your financial position after your loan application is submitted.
Here Are Some Other Wise Precautions:
Don't increase your debt burden. "The biggest error we see borrowers make is that they will file their application; they will be prequalified; they'll have picked out their home, and they'll be all excited, and they'll go and buy furniture, cars, boats and they will ramp up their debt. And since credit is often rerun before closing, that additional debt now causes them not to qualify," says Candis Duke, national operations officer at Metrocities Mortgage in Sherman Oaks, Calif.
Don't open new credit accounts, even just to transfer a credit-card balance. "If you transfer a balance to a new zero-interest card, your FICO score will drop because all of a sudden you have more credit," Mueller says.
Don't challenge the lender's requests for more documents. Asking, "Why do you want to know?" or refusing to provide certain documents may arouse suspicion that you have something to hide. Hand over as much documentation as possible upfront, so your application can be considered quickly, Gwizdz says.
Don't float your interest rate unless you can afford higher monthly payments. "If your rate isn't locked and rates go up, your debt-to-income ratio will change," Mueller says. Depending on the lender's guidelines, higher payments could prevent you from qualifying for the loan for which you'd applied.
Don't change your employment. "Right before closing, every lender verifies that the borrower is still employed in the same position," Duke says. A job change is less likely to derail your loan if you stay in the same industry, expect to earn at least as much income and don't have a gap between jobs.
Don't delay payment of your bills or rent. Paying what you owe is important, but not enough. You also have to pay on time, Gwizdz says. Rent doesn't show up on your credit report, but most lenders will check with your landlord because rent payments are a good indication of how reliably you'll pay your mortgage.
Don't skip your mortgage payment. Some homeowners don't bother to make what they believe will be their last payment on their existing mortgage because they know that loan will be paid off when they sell their home or refinance that loan. That's a huge mistake, Duke says, because a late payment can destroy your credit score.
Don't overextend yourself. If your monthly rent is $1,000, but your new mortgage payment will be $3,000, that's a huge "payment shock," Gwizdz says. All else being equal, your loan is more likely to be approved if the increase in your monthly housing cost is more modest.
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