You’ve been working hard, saving your pennies, and casually browsing home search websites (well, maybe a little more than casually, if your browser history has anything to say about it).
As you prepare for your first home, it can be helpful to know what lenders look for when deciding whether to approve your home loan application.
When you work with the friendly folks at Castle & Cooke Mortgage, the first step in the home loan process is called mortgage pre-qualification. First, you’ll get in touch with your Loan Officer, usually over the phone. They’ll ask for a few pieces of information—estimates are OK at this stage. If everything lines up, you’ll get a pre-qualification letter that gives you a good idea of what you may be able to afford.
You can take this letter shopping—and trust us, your real estate agent will be very interested in taking a look.
Once you’ve found a home you love (and that you can afford), the home financing process will shift into high gear. As you prepare for that day, here are a few things you can expect lenders to ask about:
You’ve probably heard it before, and we can confirm: you need fairly good credit in order to buy a home. Loans with the best terms and interest rates go to borrowers with the best scores.
Our incredible Processing and Underwriting teams will take a look at your FICO® credit score (with your permission, of course). We’ll check out your history of making on-time payments to see if you’re likely to repay your loan on time. Then, we'll look at how much of your available credit you’re using and how long you’ve had lines of credit open, plus any new efforts to obtain credit.
We are serious about helping families enjoy the benefits of homeownership, but we need to make sure your home loan won’t be a hardship.
When you’re thinking about taking on new debt in the form of a home loan, it’s important to be clear on the other debts you already owe.
Don’t worry—you don’t need a zero balance on all your accounts! But the less you owe, the better. We’ll use a measurement called debt-to-income ratio (DTI) to compare how much you bring in to how much you owe on a monthly basis. DTI limits aren’t set in stone, but we generally look for a figure of about 43%.
To figure out your DTI, add up all your minimum monthly payments. Then, divide that by your gross monthly income (income before taxes).
On the topic of debt, we highly recommend AGAINST taking on new debts or making big purchases until after your loan closes. We’ll re-check your credit before we draft final papers, and any new debt could throw a wrench in the works.
Having the ability to repay a mortgage requires that you have money coming in. Common sense, right? To find out exactly how much you have coming in—and how much you’re likely to have coming in the future—we’ll take a look at your bank statements, pay stubs, tax returns, and other documents that show income (retirement benefits, alimony, etc.).
If you’re self-employed, we’ll take a look at your tax returns and other business docs (think service contracts and balance sheets) to see how well your company is doing. Your Loan Officer will be a huge help at this stage in terms of knowing which docs are needed, how to find them, and how to submit them using our secure mobile app.
Next, our team will dig into your work history. Two years or more of steady work looks really good. A lot of different jobs or gaps between them, not so much.
We'll be giving your current employer a ring to make sure you work there and confirm what you make. If you haven't been there for at least two years, we'll probably reach out to your last employer too. Sorry, no bonus points for being employee of the month.
Just like we need to know how much you bring in and how much you owe, we need to know what you already have. The official industry term for that is assets, and it basically means the money you have free and clear.
We'll need to take a look at your bank and investment accounts going back about two months. We’ll check for things like recent deposits and cash reserves, and we may need letters of explanation for deposits that are especially large.
We trust you, but we are required by federal law to make sure your money is really yours—no strings attached.
Now for the nitty gritty of how much you can pay for your home upfront. We call that sum a down payment, and you may need more or less depending on the kind of loan you’re trying to get.
For some loans, you may need as much as 20% down. However, other programs may allow no money down or something closer to the range of 3.5%. When you do have less than 20% to put down upfront, be prepared to pay mortgage insurance (MI), which protects your lender in case you aren’t able to repay.
One thing worth mentioning when it comes to down payments is gifts. And we don’t mean housewarming staples like new towels or cheese boards. We’re talking about financial gifts for your down payment—that could be money from your parents, your rich uncle, or a particularly well-off friend. If you are lucky enough for this kind of gift, we’ll need a letter from the giver to prove the money isn’t a loan. Your Loan Officer can help you figure out all the details to keep everything running smoothly.
If you don’t have money for a down payment, don’t lose hope! Your Loan Officer can help you explore your options and point you in the direction of a number of down payment assistance programs.
Ready to begin your mortgage application or have questions about getting ready? Contact a Castle & Cooke Mortgage Loan Officer today!
Castle & Cooke Mortgage, LLC, does not require any documentation to complete a loan application or to provide a Loan Estimate.