It’s not the lender, it’s you. Every time you apply to borrow money for a home, a car, or a business venture, you will undergo a credit analysis by the lender. The success of this review is your ticket to getting the loan to buy the home of your dreams.
The lender’s evaluation on you and your loan centers on four or five Cs of credit, namely:
- Credit
- Character
- Capacity
- Capital
- Collateral
Seeing the Cs of Creditworthiness
While it’s important to choose the right lender (reputation, capability and customer service) in getting a mortgage, it’s equally significant to look into your qualification to get that mortgage.
Consider these key Cs as a friendly reminder to help you ace your home loan application.
Credit
Your credit score and mortgage rate go hand in hand. The higher your score, the lower your rate. It’s especially true with conventional loans that rely on loan-level price adjustments. This calculator shows the effect of one’s FICO score to loan savings.
The credit score is the compilation of your past behavior of paying your debts. This credit history is on your credit report, which can be spotless or checkered with negative events like delinquency, bankruptcy or foreclosure.
Last July, the credit bureaus stopped reporting certain civil judgments and tax liens. This is good news for at least 12 million Americans who’ll get a boost of 20 points or less in their credit scores, according to NBC News.
Character
In the traditional 5 Cs of credit, your reputation as a borrower forms your character.
Your goal is to appear trustworthy to the lender and to achieve that you must have a solid payment history.
A good score is in order but you can always build it before applying for a loan by taking on fewer debts and paying your dues on time and all the time.
What lenders look into: credit score and credit history.
Capacity
This is your ability to repay your mortgage, or how you can comfortably take on a new mortgage debt.
Post-Dodd Frank, lenders are required to evaluate a borrower’s ability to repay as a safety measure based on his/her current earnings, savings, and debt obligations.
They can consider your debt-to-income: the ratio of your gross monthly income to your housing and other monthly debt payments.
What lenders look into: income via employment/business; monthly debt obligations, e.g. credit card, installment debts, alimony; and savings.
Capital
What do you have that can help you meet your monthly mortgage payments if you lose your job or a negative financial event occurs?
Lenders thus consider reserves that, depending on the loan you’re applying, equal to six to 12 months’ worth of mortgage payments. This buffer can also come from properties, investments and other liquid assets.
What lenders look into: reserves, investment, properties, and assets that can be readily convertible to cash.
Collateral
Your home serves as the lender’s security that the mortgage will be repaid. To ensure that its interest in the home is adequately protected, the lender orders an appraisal to determine the value of the property prior to lending you anything.
Guarantees can be considered as collateral. That is, you or another interested party will guarantee repayment of the loan.
What lenders look into: the value of the home and other personal assets that may be pledged as additional collateral if required.
What are your chances of getting approved for a mortgage? Ask a lender today.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.
