The 5 C’s of Credit and What They Mean for Your Home Loan
It’s a new year. One of your New Year’s resolutions could be buying that dream home you’ve always wanted. Before you start the temptation of scouring listings online, you need to get pre-approval from your mortgage lender. That pre-approval helps you know the price range of detached and/or attached homes you can afford.
Getting pre-approval for a home loan can be intimidating, but it doesn’t have to be. Make sure to work with an experienced, full-time agent who can help guide you through the process. There is a lot that goes into determining if you qualify for a loan, but most traditional lenders will consider these 5 categories:
1. Character
Your credit score will tell lenders about your character and your credit history. Do you pay your bills on time? Are your accounts in good standing? If your credit score is poor, you should focus on improving it before applying for a home loan.
2. Capacity
This category measures your ability to pay back your loan. Your income, and your job stability, will come into play here, as well your debt-to-income (DTI) ratio. Your DTI is calculated by dividing total recurring monthly debt by gross monthly income. A ratio over 36 percent could mean you’ll pay more interest or that you will be denied a loan. If your DTI is over 36 percent, you should focus on lowering it by paying down your current debt, not taking on more debt and avoiding big purchases, such as a car, on credit before you buy a home.
3. Capital
Capital refers to the money you have, or will have, to purchase your new home. Buyers with a down payment will have a better chance of obtaining a loan but a down payment is not a necessity. There are various loan programs that do not require a down payment.
4. Collateral
In the case of home loans, collateral is the home itself. If you default on the mortgage, the bank will seize the home – this is why a home appraisal is almost always required before obtaining a loan.
5. Conditions
Is it a buyer’s or seller’s market in your area? What is the current interest rate? These are conditions that can impact home prices in your area as well as your ability to get into a home.
Article originally appeared on RE/MAX.