Most people assume that because they have a good FICO score, they can get a home loan. This is not the whole truth. In addition to good credit, borrowers also need, (1) Capacity – which is the financial income to afford a loan, (2) Capital – or enough money in the bank for reserves and a down payment, (3) Collateral – which comes from the house and verified with an appraisal.
Hi, it’s David Pestana Broker owner of Rise Realty. I want to tell you that some people make mistakes when trying to get a loan. And the number one mistake that they make is they wait until the last moment to qualify. So this is what happens. I asked them Can they get a loan. And they say oh yes we got great credit. We can definitely get a loan. And so they resist talking to a lender and then they go see a house. And then when they finally say great we’re going to buy this house. And they go to qualify they don’t get qualified. There is something else outside of FICO score what most people term as I have good credit meaning they have a good FICO. There are other things that lenders look at that are very important just as important as the FICO score and getting them qualified for a loan. In this episode we want to review those things and they’re called the Four Cs of credit. What I’m going refer to is Fannie Mae’s guidelines for the four Cs of credit of obtaining a loan okay. And the first C which we already mentioned the beginning was your credit score. You got to have a good score and they call the score a FICO score. Now typically if you’re like 700 and above you’re pretty good if you’re in the mid six hundred you can still get a loan if you got under 620. Generally you’re out of luck and you got to go subprime or hard money indeed. So the better FICO score you have the more likely you’re going to get a loan. Now there are three other C’s to this. And the second one is capital. So it’s something that a lot of people don’t think about which is capital is you’ve got to have money in the bank or assets. So what happens is you may have the good credit score but if you don’t have the money in the bank what happens if something goes wrong in your life and you don’t have the income to cover your your debts well, you’re going to default. So the banks like to see that you got money in the bank different loan programs may require different levels of capital or are making basically reserves as they call them to cover it. So if some programs may require two months reserves some may require no reserves and reserve would be one month reserve would be like if I lost. My job. And I didn’t have any money coming in I could cover myself for one month. That be one month’s Reserve. Third C of getting a loan is called capacity which basically is referring to your job and your income. OK. So do you have the capacity to buy a two million dollar house. No. OK. What. At what level of house do you have the capacity to pay for. You know the average home around here is three hundred thousand so the average person will be able to afford or had the capacity to pay for 300000 dollar home. So having good credit doesn’t qualify for you for a million dollar home if you don’t have the income to pay for it. All right. The Forth C of credit is collateral. And what this means is that when you borrow money when you get a loan the bank has to put it. It gets something and that’s going to be against the House and the House acts as collateral. So we all know if that if you don’t pay your mortgage they’re going to foreclose on your house and they’re going say they’re going to force you to sell it. And hopefully the sale that house for the bank is going to cover the loan that they gave you that you defaulted on. Well we don’t want that to happen. But that’s why the banks do appraisals to make sure that the collateral against that against their loan is sufficient to cover it if anything goes wrong. So in summary there are more things than credit score FICO that you need to get a loan. And we recommend that you talk to a lender to figure all this out. So you want to make sure that that you have a comfortable payment that you have the capacity to pay you have enough money in the bank to cover the capital requirements. And you know you all know this until it’s actually done. But the appraisal will get done and everything looks good. And your realtor can help you out. Figure it out. Make sure that the value that you offer on the House is going to be supported by the appraisal so you figure all those things out you’re good. You can go into a house with much more confidence because you not only know that you can get a loan you know exactly which loan you’re getting. What’s the downpayment and all those things. Thanks for watching. This is David Pestana broker with Rise Realty we’re here to help you.