5 C’s of Credit
When applying for a home loan there are five things mortgage lenders looks at in evaluating your application. They are known as the 5 C’s of credit.
- Credit Profile
This is generally measured by your credit score, payment history, & balances on accounts compared to credit limits.
- Capacity to Repay
Employment history of two years or more is required. Schooling in a related field counts. Qualifying income is calculated using only income that is reasonably likely to continue. Any variable income must be averaged over a two year period. Typically not more than 45% of income compared to debts (including new housing expense).
What the loan is tied to. The property must have a certain amount if equity in it (meaning you need to put 3.5% or 5% down+). Additionally, the property may need to be in marketable condition & meet certain health & safety regulations.
Where is the money being used on the transaction coming from? Do you have enough money after the transaction closes to fall back on in case of hard times? Tracking the money can be frustrating for borrowers. Plan ahead.
This is subjective. What do the documents in the file tell the underwriter? Is your loan file marginal? If so, what were the circumstances & what has changed to make this loan a good thing for everyone? Ie. Late payment after a BK?
Use your knowledge of what makes up credit to build your credit! Stronger credit generally means more borrowing power. Borrowing power translates into things like being able to borrow more and getting lower interest rates. You can use your borrowing power to purchase the home of your dreams and benefit from owing a home!