Friday, November 7, 2008

For The Mortgage Industry, It Is BACK To Basics

Over the last few months, we’ve seen sweeping changes to many facets of American life. From election to the financial market to the mortgage industry, change seems to be the norm. However, for many of the older generation and those who have been in the mortgage industry for a long time, many of the changes represent a return to the basics. With the disappearance of the NINA (NO Income, No Asset), the SISA (Stated Income, Stated Assets) and other exotic loans, we’re now more focused on another mnemonic, the Four C’s.

The Four C’s of mortgage lending refer to the four major elements that underwriters review when making a decision on whether or not to approve a mortgage loan. These elements are Capacity, Character (often referred to as Credit); Capacity refers to a borrower’s ability to repay the loan, based on the borrower’s income and various assets that a borrower could convert to cash, should they need it. Whether or not you are likely to repay the loan is summed up by your Character. Lenders rely primary on your credit report, and other sources of payment history to assess your Character. The property itself is the Collateral for the loan. In other words, it is what the lender would have if you failed to make your payments. The final C is the Capital or the town payment that the borrower brings to close the deal. The Four C’s are often explained as the four legs of a chair. While a chair might be balance with three legs, no chair will remain upright with only two legs. Of course the logic follows that a chair with four strong legs will almost always stand.

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