FINANCING THE PURCHASE OF A HOME
GET PRE-APPROVED FOR A MORTGAGE
The application process to be pre-qualified for a mortgage can be completed online and takes only a few minutes. When assessing a buyer for a loan, all lenders have one objective —manage the risk of default. To do this, lenders analyze the 4Cs—Capacity, Capital, Character and Collateral
1. CAPACITY | EMPLOYMENT + SALARY + STABILITY
Your income is perhaps the single most important factor when evaluating your capacity to repay the loan. It gives an indication of your future earnings and ability to repay the loan. Your income level and the consistency of such income over time is the best measure of your ability in the future. You will need:
- One month’s paystubs and two years W-2
- If salary + Commission/Bonus—two years history. Typically, the average of the two years is used, but if the bonus in the most recent year decreased—then that will be used
Requirements for Self-employed Individuals:
- Two (2) years personal federal tax return
- If borrower owns 25% or more of the business—two (2) years Business Tax Returns
- If your income is increasing, then the average of the last two (2) years will be used. If income decreasing, then most recent year income
Other sources of income including dividends, interest income and capital gains will require a two (2) or three (3)-year history. The Lender will verify that you still own the asset that generated the interest.
2. CAPITAL | ASSETS + CASH
Lenders will access the value of your current assets and the amount of cash you have on hand. Lenders want to know that you have the ability to pay your down payment, closing costs, and have liquid funds after the closing—A reserve. Reserves are usually 3-12 months of housing payments. Depending on the property housing payment includes—mortgage payment, common charges, co-op maintenance, taxes if condo, taxes and insurance on brownstone/townhouse.
- Liquid—Checking and savings accounts, money market, mutual funds, stocks and bonds. Typically, 70 % of the value of your stocks and bonds is used in the computation. This discounted value is used to account for market fluctuations.
- Non-liquid—IRA, 401K—60% of value can be used towards reserve.
3. CHARACTER | CREDIT
Great credit—Your credit report will give insight into your relationship with past lenders and the amount you owe in relation to your income; that is, your debt to income ratio (DTI). Your credit score will not only impact if you get the mortgage, but how much you will pay for the loan, also known as the interest rate.
- Lenders add total housing payment + total monthly debt as shown on your credit report and then divide by your monthly income to get your DTI ratio. The usual DTI require for co-op is 41% and condo and townhouses 45%
The home you purchase will be used as collateral for your loan. As such, the lender will have the home appraised to ensure the value is not less than the loan amount.
Don’t make large deposits into your accounts prior to closing as they will need to be explained. Mortgage lenders often view these as loans; and they could impact your debt-to-income (DTI) ratio and your ultimate ability to pay.
- Do not make a large purchase that will change your debt to income ratio.
- Do not change jobs before your closing—remember stability matters.
- Compare mortgage lenders to make sure you are getting the best rates.
- VA Loan
- First Time Home Buyer Loans
- Doctors Loan
*Contact your mortgage lender for more details.