Getting a Mortgage Loan: The 4 C’s of Credit

To decide if you are a good credit risk, a lender looks at four things,

referred to as the 4 C’s of credit.

CAPITAL, CAPACITY, CREDIT HISTORY & COLLATERAL

Capital – The amount of cash you have available is your capital. The more cash you have in savings accounts, certificates of deposit, bonds or other places where you can get to the money quickly if you need it, the more comfortable a lender is that you can cope with the financial emergencies that may arise after you move to your new home. Lenders will ask you to prove how much capital you have and it’s source. This is called verification of deposit. You will need to show that you have at least enough capital to pay for the: Down payment, loan fees, closing costs, escrow impounds, reserves, moving expenses

Capacity – Your ability to earn enough income to make the new mortgage loan payments and still pay all of your other living expenses is called capacity. Lenders need to see that you have the capacity or ability to repay the loan. When lenders look at capacity, they look at several things; your current income, your income history, your earning potential and the amount you owe.

Credit History – One of the best ways for a lender to tell if you will repay your home loan is to look at how you have handled other debts. If you have always repaid the money you have borrowed on time, if you generally pay cash, saving credit cards for large purchases and emergencies, you are probably a good credit risk. On the other hand, if you have many loans and credit cards and struggle to make the minimum payments that are due each month, you may need to improve your credit history before a lender would be willing to make you a home loan. If you have had credit problems in the past, you’ll probably have to convince the lender that whatever caused those problems has been corrected and demonstrate that your credit has improved with at least a 12 month history of payments on time and in full. The lender may ask you to explain even a single late payment.

Collateral – Your new home will be the collateral or extra security for your loan. Your lender will look carefully at the value and condition of the house to make sure it is worth at least as much money as you are borrowing and to be sure that the house does not need major repairs that could cost you more money than you planned to spend. Generally lenders determine value by hiring an appraiser. You will be asked to pay for the cost of the appraisal. The appraiser uses his or her professional training to estimate the fair market value of the house.

So before applying for a mortgage loan, look at yourself and ask yourself:

1. Do I have a history of saving?

2. Do I have enough cash in the bank to make a down payment and pay the other costs of buying a home?

3. Has my income been steady, and do I earn enough to make the new payment and still pay my monthly bills?

4. Have I handled credit responsibly? If I had some credit problems in the past, have I solved them and improved the way I borrow and repay?

5. Is the house I want to buy worth the amount of money I would be paying for? And is it in good shape?

6. Would making a loan to me be risky for a lender who must be sure to get the company’s money back? If I were a lender, would I make a loan to a person with my financial habits?

The YWCA DELAWARE has counselors that can work with you to help you get to where you need to be when considering buying a house. Please contact us today by calling 302-224-4060 Ext. 200.

Submitted by Carmen Ortiz
Housing Services Counselor, YWCA Delaware, Department for Economic Advancement

Source: Realizing the American Dream by Neighborworks America, 3rd Edition.