Today I was asked what a lender is looking for in a borrower and why is it so hard to qualify anymore for a home loan?
It may seem like a complex question but really it’s comes down to the FOUR C’S OF CREDIT LENDING!
This is like your report card for lending. Your evaluation according to the Four C’s ..goes like this!
Character... Refers to your financial history and if you are financially healthy. What is your credit scores? The lender will look at a two year history to determine your stability for income, job history. Your income is averaged over a two year period. Alimony and child support can be used but is averaged over three years. Here are a few items considered when a lender evaluated your risk factors.
- Have you made all your payments on time
- Do you have any delinquent accounts or collection accounts
- How much available credit do you have
- Total debt
- Income vs. debt
Capacity... This refers to amount you can afford and of course can you repay the debt. Lender’s look at your income verse your debt to see if you are already tapped out or if you can support any new debt and if you can how much. With the new QM in effect your total Debt to Income with housing and other debts cannot go over 43% of your income. I have seen very few exceptions to this rule since QM took effect back in January 2014.
Capital... How much money do you have in savings and what has your ability in the past been for saving. Do you have a retirement or pension plan, do you have investments, properties or other assets that could assist you or be sold if needed. Having these types of reserves proves you can manage your money.
Collateral... This refers to the value of the house or property you are looking to buy and if this asset will be enough to pay back the debt should you default on the loan. In some cases you may be asked to pledge other assets to secure the debt.
As you can see this can be risky if all Four C’s are not in place. No one wants to put you in a home if there is a high risk of you losing it and the bank foreclosing. They are not in the business of acquiring real estate and when they do, it has to be included back in their inventory as bad debt. This limits how much money they can then turn around and lend out. So there is good reason they follow this evaluation of your ability to repay the loan.
I hope this helps you in your preparation to buy a home.
I offer FREE Mortgage Coaching and a FREE Appraisal when you are ready to buy a home and when you are using my loan services, this credit is given at the time of closing.
Here is the link To Learn more about my FREE Coaching Program
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ACMC Loan Consultant
Certified Mortgage Coach