Understanding the 5 C’s of Credit When Purchasing a House
Understanding the 5 C’s of Credit When Purchasing a House
Most home buyers are nervous about their ability to be approved for a mortgage loan. For many it’s not because they aren’t in a good position to be approved, but that they don’t understand what the lenders are looking for. Most lenders analyze your credit with these five categories to see if you are mortgage worthy.
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Character
When a lender looks at your credit score they are looking to see what your character is in paying back your loans. Do you make your payments each month when you are supposed to? Are you current on all your payments? If you don’t feel good about these questions then you should work on getting your accounts straight before applying for a mortgage.
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Capacity
Lenders will look at your debt-to-income (DTI) ratio to see if they believe you are capable of taking on more debt. They will also look at your income along with how long you have been at your current job and how stable your employment is.
Lenders determine your DTI by dividing your monthly debt by your gross income for the month. You want your ratio to be lower than 36 percent.
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Capital
This is your ability to make a down payment. Lenders like to see that buyers have a 20 percent down payment. However, there are programs that allow them to make smaller payments or make no down payment at all. The larger the down payment you have to make though, the better your chance of being approved.
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Collateral
When you are applying for a mortgage loan the house will become the collateral for the lender. This means that if you are unable to pay on your loan you lose the house and the lender takes possession of it. During the process of approving your loan the lender will usually require a home appraisal to make sure that the value of the house is greater than the amount you are requesting.
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Conditions
The current conditions of the real estate market can impact your ability to obtain a mortgage as well. This can have an impact on the interest rates that are being charged. The higher the interest rate, the larger amount you will need to be able to qualify for when buying your house. Remember that even small changes in the interest rate add up over a 30-year mortgage.
It can be overwhelming and a bit intimidating to apply for a mortgage. However, there are some things that you can do to make the process easier.
The first is to start getting your finances in order. Watch your credit score and save for a down payment. You can also meet with a mortgage lender to get pre-approved for your mortgage before looking for a house.
If the lender isn’t able to approve you at this time they will provide you with recommendations of what you need to do to improve your chances. You can also talk to several mortgage lenders. If you are a borderline “no” for some lenders others might still be willing to approve your loan.