Capacity = Willingness and ability to pay back the loan
Credit = Payment history and current balances; willingness to repay
Character = Job stability and or time in property
Collateral = Property or what the lending institution will be left with if the borrower fails to pay.Another one of the C's that is often over looked is Cash to Close. Liquid assets readily available to pay the down payment, closing costs, and prepaid items of a mortgage transaction.
Credit is one of the most important things a borrower must be aware of when buying a new home. The credit report is a representation of how you pay your bills. If you have great credit. A Bank is willing to finance up to 106% . Which would allow a person to purchase a house with no money down.
Character ? from the standpoint of underwriting, lenders are usually looking for a minimum or two years work history at the same company. If you have changed companies in the past two years, but are in the same line of work, as long as your income has stayed the same or increased lenders will accept that. The longer you have been employed with the same company and in the same line of work the better off you are and the more lenient the lender may be on other factors.
Knowing what lenders are looking for and planning to provide them what they need in order to fund your loan is the best way to make sure you can get the best loan for you.
From an underwriting perspective, if a loan package is significantly strong in one of the "C" areas, deficiencies in another "C" can be given less weight.
Example, if a borrower is putting down a large down payment the Collateral would be stronger so a weaker credit score might be tolerated.
Credit - Although there are a few programs that are not credit score driven, by far you will be able to secure a better rate if your credit rating is good. Payment history plays a big part in your credit score and this shows the lender your track record of payments to your creditors. It's more probable that you will pay your loan on time if you pay your other bills on time. If you have high balances on your other debt such as credit cards and automobiles this can affect your Debt-to-income (DTI) ratio and put you at more risk in the eyes of the lender. The reason good credit scores are important is because you have the ability with good scores vs. bad scores to qualify for no income verification or no documentation loans.
Collateral-From the standpoint of loan underwriting, the higher the stake a homeowner has in the property, the less likely he would default on the mortgage. Statistics have shown that if homeowners have 20% or more in equity in their homes, lenders are less likely to suffer a loss as a result of default. For home buyers who have less than 20% to put down as down payment, many banks are willing to grant them loans as long as these home buyers have other compensating factors, such as a better than average credit profile, or a low debt to income ratio. As a safety measure, most banks require home buyers putting down less than 20% to carry Private Mortgage Insurance, which insures the banks against loss due to homeowner default.
Capacity - Capacity goes hand and hand with credit. When a lender reviews your credit there are 2 major factors they are looking at aside from credit scores. One is your DTI or Debt-to-income ratio and the other is your credit history. Both of these will determine your capacity to repay the loan or your risk to the lender.
Capacity also refers to the amount of debts you can realistically pay given your income. Creditors look at how long you've been on your job, your income level and the likelihood that it will increase over time. They also look to see that you're in a stable job or at least a stable job industry. It's important when you fill out a credit application to make your job sound stable, high-level and even
?professional.? Are you a secretary or are you an executive secretary or the office manager?
Finally, creditors examine your existing credit relationships, such as credit cards, bank loans and
mortgages. They want to know your credit limits (you may be denied additional credit if you already have a lot of open credit lines), your current credit balances, how long you've had each account and
your payment history, whether you pay late or on time.
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