On the 4th day of tips, bits & lists, we're focused on the 4 Cs. You're probably thinking diamonds, but actually we're talking about the 4 Cs of qualifying for a mortgage.
If you'd like to buy a home but you're not sure what mortgage lenders look for in a borrower or whether you could qualify, understanding the 4 Cs is a good place to start:
- Capacity – Your current and future ability to pay back the loan. Lenders look at your income, employment history, savings, and monthly debt payments, such as credit card charges and other financial obligations, to make sure that you have the means to take on a mortgage comfortably.
- Capital – The money and savings that you have on hand plus investments, properties, and other assets that could be sold fairly quickly for cash. Having these reserves proves that you can manage your money and have funds, in addition to your income, to help pay the debt.
- Collateral – The value of the home that you plan to buy.
- Credit – Your record of paying bills and other debts on time. (Even if you don't plan to buy a home now, it's always a good idea to build and maintain strong credit. Landlords often check it to make sure that you can pay the rent; it's also important if you want to apply for a mortgage or other credit line in the future, such as a student loan, car loan, or credit card.)
What about the down payment? Lenders also take that into consideration. Although 20% is something of a magic number, many homebuyers put down much less. Freddie Mac's Home Possible Advantage Mortgage®, for example, is available to qualified borrowers with as little as 3% down.
Read other posts in this series and stay tuned for the next 8 days of tips, bits & lists.
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