Congratulation! You are about to start a process that will give your family long-term security and pride.
Taking out a mortgage is a decades-long commitment between you and your lender. In a way, the lender is trying to predict the future. The lender mainly wants to know if you can pay the loan and if you will pay the loan. To do this, the lender looks at the four Cs.
Capacity: You must have the necessary employment and income to be able to pay back the loan. To this end, the lender will often review several years of documents:
– Federal income tax returns, W-2s, and current pay stubs. These confirm that you are currently employed, how much money you make and where it comes from.
– Your current debts and liabilities. The lender will want to look at car payments, student loan debt, credit card payments, child support, alimony, and any other debts you have. You'll need to be able to provide documents on any of these items.
Capacity: What cash assets, investments, property, or other access do you have that you could access quickly for cash? They will look at savings, money market funds, retirement accounts. You may need to show at least two months of states from checking and savings accounts. Gifts (not loans) from family members count as cash reserves and you might need a letter from family members that says the cash is not a loan, but a gift.
Collateral: When you buy a home, the collateral is the home you are buying. So the lender will have the home appraised to determine a fair value. The mortgage should be in line with the value of the home you want to buy.
Credit: The lender will check your credit score and credit history. Mainly the lender wants to know if you pay your bills on time. The better your credit score the better the interest rate on your loan.