Do you think of your credit strictly as a number? Do you think that lenders strictly look to see if you are above the specific threshold that they set and then approve you for the loan accordingly? The honest truth is that they look at so much more than your score. Yes, the score does play a role in your ability to get approved – some lenders will not talk to borrowers beneath a specific threshold, but there is so much more involved in your credit that lenders look at. Here are the 5 C’s of credit that you need to understand in order to get a full grasp on why you do or do not get approved for a mortgage.
The Credit History
The most obvious “C” of the 5 C’s is your credit history. This is what makes up your score. Certain things like late payments and over extending your credit bring your credit score down, while timely payments and using only a small portion of your available credit can boost your score. You can think of your credit history as your report on how you handled your financial obligations. It offers future potential lenders the ability to see how you handled your outstanding credit including how much you used in regards to credit lines, how often you made your payments on time, and how much credit you had outstanding at once. Your credit history plays a major role in your credit score as well as in how the lenders view your risk level.
Your Capacity for a Loan
Your capacity to afford the loan plays a vital role in your ability to gain mortgage approval. Your capacity is determined by your income, assets, and employment history. Each of these factors helps to determine your ability to repay a loan. For example, if your employment history is sketchy, your capacity might be considered limited. What would hold you back from changing jobs again or losing your job because of your inconsistency? Lenders need to take these things into consideration when determining if you are a good risk for a loan.
What’s your Collateral?
You have to give up collateral in order to secure a loan. Of course, with a mortgage, any mortgage, the collateral is the home you purchase or own, if you are refinancing. You have to know the value of this collateral in order to qualify for a mortgage. Most programs require you to have at least 3 percent of your own equity in the property, but there are exceptions to the rule, such as is the case with VA and USDA loans.
What’s your Capital?
Your capital is your assets. This means the amount you can show the lender that you have on hand that is not tied up in your home or any other non-liquid investments. The more capital you have, the less risk you pose to the lender. Your capital can include checking and savings accounts as well as other investments that could be considered liquid, meaning that they could be converted into cash in a short amount of time. There is no specific number necessary for capital that makes you automatically eligible – each mortgage program requires a different amount.
What are your Conditions?
The final “C” stands for conditions. It is the conditions that you bring to the table that determine your riskiness for the lender. These risks could include a variety of things include:
- The amount of money you are borrowing compared to the property’s value
- The history of the property values in the area
- Your income history
- Your employment history
- Your credit history
Overall, these 5 C’s make up your profile for a lender; they look at each of these factors closely to determine whether or not you make a good risk for a mortgage. It also helps to determine what loan program you qualify to receive. No matter what program you wish to qualify for, the process for evaluating your level of risk is the same.