Can I get a Loan?
This is a great question, especially in today’s tough lending environment. Today, everything is on sale when it comes to real estate, but for most of us, we will need some assistance in the way of a mortgage to help finance home ownership. When I sit down with a client, I go over the 4 C’s of lending with him. The 4 “C’s” of lending are Credit, Collateral, Cash to close and Capacity to repay. Each category is a very important part of the loan process and anyone of them is reason for a lender to turn him down. Now the best part is that when working with a knowledgeable Loan Originator, if you are not able to qualify for a loan today, he will set up a road map so you will be able to do so in the near future.
The First “C” of lending is Credit. When applying for a loan, a lender is going to pull your credit report from all three major credit bureaus: Equifax, TransUnion, and Experian. Credit scores range from 350 to 850 and in order to qualify for a loan today, you will typically need a minimum between 620 and 640. In order to qualify for the best rates, your middle credit score will need to be at least 740. So what does a credit score mean? In simple terms, it rates the likelihood that you will pay your loan back. So, the lower the score, the less likely you are in the lenders eyes to be able to repay the loan and thus will most likely have to pay a higher rate or put more money down.
“C” number two is collateral or the property itself. As part of the loan process, an appraisal will be ordered to come up with a value for the home you want to buy. If you are to get a loan, the house should be worth at least as much as you are paying for it. If not, the lender is on going to lend based on the amount of the purchase price, so you will have to make up the difference. Now the value is just one issue with the appraisal. The second is the condition of the property. Most loan programs want the property to be in at least average condition. If the property requires a lot of repairs, the lender may require those items to be corrected before the loan can close and if you are buying a bank foreclosure, the bank may not be willing to do this.
The third “C” is Cash. In order to buy a property today, you will need a required amount of money to execute the transaction. We will have to source and season the funds. This is done by reviewing your most recent two months of bank statements. All large deposits must be sourced and come from an acceptable place. A refund for you taxes is acceptable. Money you have been saving under your bed is not.
The final “C” is the Capacity to repay or Income. You must have some source of stable income. This can come from a job, retirement or disability to name a few. It must be ongoing with the likelihood to continue for at least 3 years. Income is one of the toughest parts of a loan document and much time goes into determining how much income can be used. Lenders use the DTI or Debt to Income ratio to determine your maximum loan amount. The ratio needs to be below 50% and is calculated by taking your total monthly expenses (those that show up on your credit report) and your new mortgage and dividing that number by your gross monthly income. . So if you total monthly expenses are $3,500 including the new mortgage payment and you make $10,000 a month, your DTI will be 35%.
If the four “C” can meet the requirements required of the loan program, you should be in great shape to qualify for a home loan today!