In years past, a steady job and good credit were all you needed to realize the dream of homeownership. But due to the current state of the mortgage industry, today's lenders are forced to be much pickier.
If you are planning to purchase a home or refinance your mortgage, you may find that you will need more than a paystub in order to qualify. Here are the 4 C's that lenders look for on a prospective borrower's loan application:
Capacity - refers to the borrower's ability to cover the interest and principal due on the loan, plus the cost of maintenance, homeowner's insurance and property tax.
Capital - indicates the amount of the borrower's down payment as a percentage of the value of the home.
Character - alludes to the borrower's record of paying debts as seen by his or her credit rating.
Collateral - is the soundness of the investment as demonstrated by the aforementioned qualities, the value of the home as determined by a professional appraisal and the agreed-upon purchase price.
Mike Mueller, a mortgage broker in San Francisco, explains the way lenders look at prospective borrower's as a chair.
"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."
To aid this process, your lender will require paperwork that substantiates your ability to repay the loan. At the minimum, you should be prepared to provide a month of paycheck stubs, two years of W-2 forms and three months of bank account statements.
If you are self-employed or earn more than 25 percent of your income from commissions or bonuses, you may need to provide additional tax returns.
And if you're divorced, the lender will want a copy of your settlement to ascertain how much alimony or child support you're obligated to pay or are entitled to receive and the duration of those payments.
The dream of becoming a homeowner is still attainable; you may just have to work a little harder to reach it.
Goran Jovanovic
YOUR World Class Realty Team
Direct: 954-243-7570
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