How to wow your mortgage lender

By Bankrate.com

Whether you're buying a home or refinancing an existing home loan, you'll soon find out that lenders today are a picky and demanding bunch when it comes to loan approvals. Even well-qualified borrowers are expected to jump through some pretty high hoops to qualify for financing.

But fear not: These tips and suggestions can help you make the best possible impression on the lender of your choice.

Just as job hunters may wonder what top employers want to see on a resume, prospective borrowers may be curious about what lenders look for on a loan application.

The four C's

The answer may be summed up with a mnemonic called "The four C's," according to Greg Gwizdz, national sales manager for Wells Fargo Home Mortgage in Des Moines, Iowa.

• Capacity, which refers to the adequacy of the borrower's income to cover the interest and principal due on the loan, plus property taxes and homeowners insurance.

• Character, which refers to the borrower's track record of paying debts, as evidenced by his or her credit history and credit score.

• Capital, which refers to the borrower's down payment (or equity) as a percentage of the current value of the home.

• Collateral, which refers to the safety and soundness of the home and the value of the home as determined by an appraisal relative to the agreed-upon purchase price.

Mike Mueller, a mortgage broker with Patagonia Finance in San Francisco, uses a quadrant with "income," "credit," "assets" and "property" in the four corners, but his point is the same as that of the four C's: Neither a high income nor an exemplary credit report alone is enough to make your loan application stand out. What lenders like to see is strength and stability in all four areas.

"If you're strong in all four corners, you're on a chair," Mueller says. "That's pretty stable. In theory, I can take away one of the corners -- maybe your credit score has some dings or you need a stated-income loan -- but the other corners are still pretty solid, so you have a tripod. That's not as stable as a chair, but it will still stand up. If you take away another corner, you have a ladder. Ladders don't work anymore."

Borrowers who are qualified but whose down payment will be less than 20% of the purchase price of the home must withstand a second level of scrutiny. That's because mortgage insurers also have to approve such loans, and they have "completely different qualification ratios," Mueller says. Borrowers in this situation should discuss their options with a loan officer who is familiar with lenders' and insurers' guidelines.

Have paperwork in order

Lenders rely not on the borrower's say-so but on a pile of paperwork to verify and document the borrower's financial position. At a minimum, most borrowers are required to submit the following:

• One month of paycheck stubs.

• Two years of W-2 forms.

• Three months of bank account statements.

Additional paperwork also may be required:

• If you're self-employed or earn more than 25% of your income from commissions or bonuses, you'll need to hand over two years of income tax returns.

• If you're divorced, the lender will want a copy of your settlement to ascertain how much alimony or child support you're obligated to pay or are entitled to receive and the duration of those payments.

• If you've filed for bankruptcy protection within the past seven years, you'll need to show your bankruptcy papers.

• If you've deferred repayment of student loans, you should provide your deferral agreement as well.

"If (borrowers) have student loans that are going to be deferred for at least 12 months, that may help them qualify, so they would want to bring the account numbers for those loans," says Candis Duke, national operations officer at Metrocities Mortgage in Sherman Oaks, Calif. Student loans are counted as debt, but deferral of repayment may strengthen the borrower's application.

Continued: Don't make changes

 1 | 2 | next >