Some people believe finance lenders are out to get you. This thinking is born out of a misunderstanding of how they determine who to give financing too and on what terms. However, if you know how they arrive at their calculations, you will find the process is far from being ad-hoc and is actually very straight-forward. These lenders all have established formulas that look into the 4Cs: Capacity, Credit History, Capital, and Collateral. How solid you are in these areas will dictate how good of a candidate you are. Here, we take a look at each factor and give suggestions on how you can improve your score in each of them:
1. Capacity
Essentially, takes a look at how much you can borrow. This will look at factors like how much money you make and whether you can pay off the debt. The general rule is that your mortgage payments should not be more than 30% to 35% of your monthly income. This debt percentage should include not only the mortgage payments, but all other debts like auto loans and credit card debt. Obviously, there are several ways you can improve your capacity. One way is to find ways to bring in more income allowing you a large base to draw the percentage from. Another way is to improve your long term prospects to get a larger salary down the line. Some lenders take into account your future income prospects to make this determination. Finally, you can look at finding ways to pay down other debts like car and credit card debt. Each of these will help improve your capacity score.
2. Credit History
FICO scores of over 650 plus get the best rates and terms.
Many financial advisers suggest raising your score if under 620 and avoiding subprime mortgage loans. Basically, you will see interest rates and down payments climb when you have below a 620. Therefore, you be sure you allow yourself enough time to repair your credit history and fix any errors in your credit report. Another thing you consider is building up a history where you are paying off the two main kind of debts: (a) credit card debt and (b) loan debt. Both types of debt are viewed differently by finance lenders and you should have a history of both kinds being paid back over time in your credit history.
3. Capital
Capital is essential money you have beyond your basic monthly income. This can take many different forms ranging from checking and savings accounts, 401k plans, IRA plans, Insurance policies, valuable belongings, stocks, and essentially any other investments or investment property. The key here is the larger amount of capital you have, the less of credit risk you are. This translates into a better score for financing. Obviously, this will be the hardest factor to improve upon because it is either something you have acquired over time or through inheritance. The one thing you can realistically do in this area is start making an effort to save extra money in the event you have paid off all your other forms of debt. In addition, you should take advantage of free money situations where your employer matches your contributions in your 401k plan as this is essentially free money for you.
4. Collateral
This factor takes a look at how valuable the actual home is. The more valuable and market worthy the home is, the higher your collateral score will be. This is essentially a safety standard where the finance lenders want to know that you won’t simply walk away from the deal if things go south. Areas they look at to score the house are looking at potential problems of the home like electrical issues, foundation issues, regular maintenance needs of the home, roofing problems, etc. Naturally, the fewer the problems, the better. By selectively choosing homes that are in better condition, you can go a long way towards getting a higher collateral score. The use of good inspectors can help considerably here.
By keeping these different factors in mind, you can actually improve your standing to get the best financing from finance lenders. Hopefully, this has taken away some of the mystery surrounding home financing.
For more information on Finance Lenders, visit the previous link or http://www.homeloansandrefinancing.com to get some solid tips and information on various home loans and refinancing options.
