When you apply for a mortgage loan, the lender will often look at "the four Cs" to decide whether you're creditworthy. They want to ensure that you're a good risk and can be trusted to pay back the loan.
• Capacity
Capacity is your current and future ability to make payments. Lenders will look at your income, employment history, savings, and monthly debt payments.
• Capital
Capital, or cash reserves, refers to the reserves of money and savings, investments, properties and other assets that belong to an individual and that can be sold relatively quickly for necessary cash.
• Lenders will evaluate your application more favorably if you can verify that you have cash reserves. Cash reserves show the lender that you can manage your money well and that you can count on other funds, in addition to your income, to pay the debt.
• Collateral
The lender on a mortgage loan wants to know that the property is worth enough to cover the loan.
• Credit
Lenders look at your credit and on-time payment history to see your record of paying bills and debts.
Lenders will ask for financial statements to see if you meet all of their criteria. Sometimes your strength in one area can cancel out your weakness in another. For example, if you own a home (strong collateral), but your credit history contains several late payments (weaker credit), the lender may not penalize you.
What financial statements will you most likely need to show?
• Pay stubs for the past 30 days.
• W-2 forms for the past 2 years.
• Information about long-term debts, like car loans, student loans, etc.
• Recent statements from all of your bank accounts.
• Tax returns for the past 2 years if you're self-employed.
• Proof of any supplemental income.
• Records of any past derogatory credit accounts that have since been paid off.
• Records of child support or alimony.
Many lenders may offer lower documentation or no documentation loans. These are easier for many borrowers. However, the rate for the loan likely will be higher than for a full documentation loan.
Check your credit
Be sure to get a copy of your credit report well before going to your lender to make sure there are no errors on the report. If you find errors, work to immediately correct them as they can impact your purchase process and cost you time and money!
