One of the most, if not the absolute most important aspects of a mortgage application is the borrower’s credit. We all know what a credit score is, we’ve all heard of it when applying for any type of loan and if you’re savvy and conscious of your score, you probably check the credit apps on at least a weekly basis.
When applying for a mortgage, the lenders base the credit check on 5 critical elements that are called – The Five C’s of Credit. As your trusted mortgage professional, I have the responsibility to share as much information as possible.
Capacity
In short, this is the borrower’s ability to repay the mortgage loan. In addition to that, this is the most critical of the Five C’s of credit as it weighs about 36% of the entire credit check. The lenders evaluate the borrower’s Debt Service Ratios (you can find my blog about service ratios here) and a review of existing open credit/loans and the payments history on them and assess the ability to repay a loan.
Capital
This refers to the amount of money that borrowers have invested in a property. Lenders like to see that borrowers have taken a financial risk/investment by allocating their own capital into the purchase of a home. In everyday terms, this is usually called a ‘down payment’.
Character
Essentially, this can be referred to as credit utilization and job history. If all the required debt obligations are paid on time and the length of employment history doesn’t reflect constant job hopping, the application will look good to the lenders. Also, the ability to save money and keeping credit card utilization managed will help build a strong character in the eyes of the lenders.
Collateral
Much like any type of security used for a loan, the collateral in this case would be the property itself. Aspects of the property such as the value, location and the characteristics of the home will be taken to account here. Collateral can also include the use of guarantors who will guarantee payments when the borrower can’t make the debt obligations.
Credit
This aspect focuses on the credit history and the repayment history of the borrowers. By analyzing credit history, lenders can predict the borrowers ability to fulfil future payments. This would be a reflection on a borrowers’ financial maturity which is what lenders prefer to see on a mortgage application.
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