4 Steps to Successfully Qualifying for a Mortgage
Check out these 4 steps to learn how to successfully qualify for a mortgage.
I've had another opportunity to record a brief (5 minute) podcast for a client of mine. As the information may be helpful I am posting it here. You can watch and listen to the original recording here!
"Hello and welcome to the podcast. This is Kimberly Zimmerman Rand of Dragonfly Financial Solutions and I am here today to talk about the Four Steps to Successfully Qualifying for a Mortgage. Mortgage applications are assessed on what is called “The Four C’s.” They are Capacity, Capital, Credit and Collateral, and they all play a part in determining if you will qualify for a mortgage. Let’s dive in and learn more about the Four C’s:
Your capacity indicates how much you can reasonable afford in monthly housing costs. Those costs are referred to as PITI. PITI stands for Principal, Interest, Taxes and Insurance. Principal and Interest make up your mortgage payment, Taxes are your real estate taxes and Insurance is your homeowners insurance. There is sometimes an A at the end of PITI. This A stands for Association fees. They apply to buyers who are buying into condominium or homeowners associations.
Capacity is determined by calculating your Debt-to-Income Ratio. This is a comparison of your monthly debt payments to your gross monthly income. A common debt-to-income ratio is 28/36. 28 is your Front End Ratio. To find it multiply your gross monthly income by 28%. A lender will allow you to spend up to 28% of your gross monthly income on housing costs. 36 represents your Back End Ratio. To find it multiply your gross monthly income by 36%. Your lender will allow you to spend up to 36% of your gross monthly income on all debt payments combined. This includes your housing costs as well as any car loan, student loan, personal loan or credit card debt that you may have.
You capital is the liquid assets that you will contribute to your home purchase. It constitutes your “skin in the game” and shows your lender that you are serious about your investment. Conventional mortgages require a 20% down payment on the sales price of the home. Local first-time mortgage products may require smaller down payments as low as 5% or maybe even less. Additional capital requirements include closing costs (which range from 2- to 5-percent of the purchase price), escrows for your real estate taxes and homeowners insurance, and reserves in the amount of 2- to 4-months’ worth of mortgage payments.
Your capital will most likely come from your savings account (or CD or money market account) or other assets that can be made liquid such as stock, bonds or mutual funds. Is it possible to use some funds from your retirement accounts as part of your capital requirement, as it is to use the cash value of a whole life insurance policy. Gift money is also allowed, and some municipalities offer down payment and closing cost assistance to their resident first-time homebuyers.
Your credit is a representation of your history of repaying your debts. As a part of your mortgage application your lender will pull a copy of your credit report and credit score and will use this information in assessing your mortgage application.
To make your credit report and score the best it can be, first order a copy of your credit report and check it for errors. Dispute any mistakes that you find. Second make sure that you pay all of your debt obligations on time and pay down your credit card balances.
The collateral in your real estate transaction is the home itself. The market value of the home is confirmed through the appraisal process. This is when an independent appraiser studies the home itself, the overall condition of the neighboring properties, and the sales prices of comparable properties that have closed in the past six months.
To best insure that your prospective home will make it through the appraisal process, be sure to track the sales prices of homes similar to the one you want in the neighborhood you want to buy. Use this information to help you determine how much to offer. And don’t feel pressure to overpay for a desirable home. If the appraisal comes back for less than the agreed upon amount your lender might back out of the deal.
So those are your 4 steps to successfully qualifying for a mortgage:
• Capacity – your ability to support monthly housing costs
• Capital – your savings that you will contribute to down payment and closing costs
• Credit – your history of repaying your debts
• Collateral – the market value of the home you wish to purchase
Good luck in buying your home! Again, this is Kimberly Zimmerman Rand of Dragonfly Financial Solutions. Thanks for joining me!"