The Four Cs of Mortgage Lending

Mortgage lenders look very carefully at each loan application - especially in tough financial times - before they lend money. Just like jewelers carefully examine diamonds under bright light and from different angles, lenders look at several aspects when reviewing a loan application for approval. Also like diamonds, the attributes being evaluated are called the 4 C’s – character, capacity, capital and collateral.

As underwriting guidelines have become more stringent, it is increasingly clear what a good mortgage loan application looks like. As you begin your search for a new home, here are a few things you can do for your loan approval to go smoothly and obtain the best mortgage terms possible.

Character: Character refers to the client’s credit history and score. You can take a few key steps to improve their credit score. Keeping credit card balances below 30% of the credit limit, limiting credit inquiries and refraining from opening or closing an account all help produce higher credit scores. If a you have derogatory accounts, a thorough and reasonable explanation letter is often enough to keep things moving.
Capacity: Capacity is the borrower’s ability to repay the loan. Lenders will review your paystubs, W2s, tax returns and other income documentation. Clients will be asked to explain and document deductions such as unreimbursed business expenses, child support, alimony and other garnishments. Deductions need to be addressed upfront as they can affect your qualifying income and ultimately the approval.
Capital: Capital refers to your assets. Underwriters review bank statements for sufficient funds to cover the down payment, closing costs and reserves. In addition large deposits must be addressed to rule out any undisclosed gift funds or loans. What’s a large deposit? Typically anything in excess of a few hundred dollars. Deposits larger than that will need to be explained and documented.
Collateral: Collateral is the home. Lenders evaluate the value and condition of the home based off the information provided on the appraisal. Comparable properties need to be as similar as possible, without excessive adjustments for variations and the data must be current. Additionally repairs may be needed to meet program guidelines.

Overall clients are advised to use their credit wisely, to think before granting someone access to their credit report, keep copies of their financial documents handy and work with an experienced originator who knows how to present the loan application in the best possible light. Looking for a lender who can help you smoothly navigate the loan process? Contact me, I’m here to help.