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The 4 C's of Qualifying

Qualifying for a mortgage can be explained with 4 C’s.  Capital indicates the borrower has the necessary funds for the down payment and closing costs without exhausting their savings.  Capacity shows that the borrower has the ability from income to pay back the loan.  Credit history reveals the borrowers FICO score, which is a composite of payment history, amounts owed, length of credit, new accounts and the different types that are open.  The final C is for collateral proving that the home’s value will secure the loan.

To protect consumers and the lending market, the Dodd Frank Reform Act became law in January 2014.  The Qualified Mortgage Rule affects the underwriting standards that most lenders use to qualify buyers.

The ability to repay rule states that financial information must be supplied by the borrower and verified by the lender.  The borrower must have enough assets or income to pay back the loan which limits the maximum debt-to-income ratio of 43%.  To present a more accurate picture of the costs to the borrower, teaser rates can no longer hide a mortgage’s true cost.

A maximum of 3% in upfront points and fees can be paid on behalf of the borrower.  There can be no negative amortization, interest-only or balloon payments and the loan term limit cannot exceed 30 years.

While there are more requirements, most deal with good underwriting practices that are followed by reputable lenders such as considering and verifying things that affect the ability to repay the mortgage like income, assets, employment status, simultaneous loans, debt, alimony, child support and credit history.

Even though most mortgage lenders are bound by this law and its many rules, all lenders may not deliver the service that you expect and require.  For a recommendation of a trusted mortgage professional, give me a call at (843) 683-9592.

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