Indigo Mortgage: Paving the Way to Your Next Home Mortgage: Knowing the 3 C’s of Lending

Understanding what lenders look for in borrowers is imperative before attempting to obtain credit. There are guidelines lenders follow when determining a borrower’s creditworthiness. Knowing the criteria and preparing for them before you apply for a home loan or refinance can increase your chances for success.

Lenders use a strict guideline based on the 3 C’s principle: Capacity, Credit, and Collateral. These three factors are weighted and evaluated when determining your creditworthiness. Each “C” is important in its own right and understanding and knowing where you stand will help you determine how best to proceed.

Capacity

The term capacity in lending means what is the borrowers’ ability to repay their debt obligation. A lender will evaluate your time on the job. Typically, lenders will require a minimum two-year employment history. There will look at your tax returns and see if your income is on a W-2 or 1099.

The same is true if you are self-employed. They will factor in profit and loss statements to determine your final income. Lenders will also view your debt to income ratio (DTI). Simply put, this is how much debt do you have versus your income. This will include vehicle loans, student loans, and any credit card debit.

As an example, you and your spouse’s yearly gross income is $79,000 for a monthly gross of $6,583. Your mortgage payment will be $1,150, your car payment is $310, and your minimum credit card payments are $225. You do not include utilities and groceries. This gives you a monthly debt load of $1,685.

Now you divide the $1,685 by $6,583 and you will see your debt-to-income ratio is about 26%. Typically, lenders like to see your DTI under 38%. The lower your DTI ratio, the better candidate you are for a loan.

Credit

This is where your home loan process begins. In order to qualify for a conventional loan with the best rates, borrowers must have a FICO score of 740 or higher. Borrowers seeking a VA or FHA loan need a FICO of 620 or higher in order to qualify. Your FICO is influenced and determined by a number of different factors.

Your FICO is based on your credit balances and unused credits available, how old your accounts are, your payment history and how many different accounts you have. Late payments -- even 10 days late -- can negatively impact your score. Potential borrowers should pay careful attention to due dates and total credit available to ensure small dings do not add up to pitfalls.

Collateral

The collateral you offer is the property being mortgaged. Lenders will scrutinize the property to ensure it is worth what the mortgage balance will be. Gone are the days when quick appraisals ruled and homes were not properly valued.

A thorough appraisal will be undertaken to protect the lenders interest. A home needs to be valued at the cost requested.

Worth Their Weight in Gold

The world of underwriting is ruled by these three factors. Each component has equal bearing on whether you receive a home loan or refinance. If just one factor is outside the lenders guidelines, you will probably not qualify for a home loan or refinance.