The 4 Cs to Mortgage Loan Approval
If you are in the market for a new home, knowing and understanding the 4 C’s to obtain a mortgage loan is crucial. When you know precisely what is important to banks and how you can use it to your advantage, the chances of you being approved for a loan at a good price are much higher.
What are the 4 Cs for Mortgage Loan Approval?
Credit, Capacity, Capitol, and Collaterals are the four important Cs in the mortgage world and the most looked-at factors by banks when it comes to loan approval.
So, what do each of the 4Cs mean, and why are they so important? Let us take a look.
Credit Score
Your credit score plays an enormous factor in securing a home loan. While there are programs out there that can help you out even when your score is less than perfect, it is better to keep your report clean to lock down a reasonable interest rate and monthly payment.
All mortgage lenders run credit checks before approving anyone for a loan. This is done to ensure you have a good history of making your monthly payments on time and of getting an idea of how much debt you are currently responsible for paying back.
Whether you are looking to buy a home now or sometime in the distant future, it is in your best interest to take a look at your current credit score and see where improvements can be made.
Capacity for Repayment
Your current monthly obligations, debt, ad income are other considerations taken by the bank when deciding whether or not to offer applicants a mortgage loan.
When applying for a mortgage, your bank will ask you for
- Proof of income (employer, self-employed, disability, etc.)
- Length of time you have worked for your current employer
- How long you plan on staying at your current place of employment
You will also be asked for a list of current debts you are responsible for paying back. This is to compare the money coming into the money going out of your bank account every month. If it looks like you are already limited in funds to repay your current debt, you might not be able to secure a mortgage.
Capital or Cash
Aside from the money you make weekly from your job, banks will also look at your current savings, investments, and assets to see where else cash can come from outside of your income.
Having valuable assets can increase the likelihood of banks offering you a loan because it can provide a sense of security, knowing there is a way of getting their money back even if something appends to your job.
Types of capital banks can consider it includes.
- Retirement funds
- 401K
- Stocks
- Bonds
- CDs
- Savings
You can also use “gifts” from family or friends as long as you have proof that the money was, in fact, a gift, and you do not have to pay it back.
Banks will check the source of your capital, even looking over your bank statements up to six months into the past. Mortgage lenders do this to ensure the money you offer is obtained legally and isn’t a source of debt.
Collateral for Reassurance
Your new home is the collateral you are giving to the bank. Collateral is a valuable asset or property that can be taken away if your loan is not paid back.
With the home being the collateral, a bank can foreclose on your house if you don’t make your monthly payments, taking it back and reselling it to recoup their losses.
This can become a significant problem for the person who loses the house since they are responsible for the remaining loan balance if the new sale doesn’t cover it all.
Final Thoughts
Credit, Capacity, Cash, and Collateral are the four Cs of home loans. Knowing them inside and out and making each a priority before purchasing a home will ensure you get the best rates and repayment options out there.
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Related Video: Mortgage Points Explained
FAQs
Meet the Fantastic Four - the 4 C's: Capacity, Credit, Collateral, and Capital. These titans hold the power to make or break your dream of homeownership. They're the guardians of mortgage approval, keeping a watchful eye on every aspect of your financial life.
What are the 4 Cs of mortgage lending? ›
Standards may differ from lender to lender, but there are four core components — the four C's — that lenders will evaluate in determining whether they will make a loan: capacity, capital, collateral and credit.
What are the 4 Cs of finance? ›
Concept 86: Four Cs (Capacity, Collateral, Covenants, and Character) of Traditional Credit Analysis. The components of traditional credit analysis are known as the 4 Cs: Capacity: The ability of the borrower to make interest and principal payments on time.
What are the 5 Cs of credit approval? ›
The lender will typically follow what is called the Five Cs of Credit: Character, Capacity, Capital, Collateral and Conditions. Examining each of these things helps the lender determine the level of risk associated with providing the borrower with the requested funds.
What are the 3 Cs in mortgage? ›
The Three C's
After the above documents (and possibly a few others) are gathered, an underwriter gets down to business. They evaluate credit and payment history, income and assets available for a down payment and categorize their findings as the Three C's: Capacity, Credit and Collateral.
What are the 4 elements of a mortgage? ›
There are four components to a mortgage payment. Principal, interest, taxes and insurance.
What is collateral in 4cs? ›
* Collateral--If you fail to repay the loan, is there something of value that you agree to forfeit? For example, if you're buying your first car, it would be collateral to ensure that you will repay the loan. If you default, you lose the car.
How are the 5 Cs used by lenders? ›
The five C's, or characteristics, of credit — character, capacity, capital, conditions and collateral — are a framework used by many lenders to evaluate potential small-business borrowers.
What are the 5 Cs of underwriting? ›
The Underwriting Process of a Loan Application
One of the first things all lenders learn and use to make loan decisions are the “Five C's of Credit": Character, Conditions, Capital, Capacity, and Collateral. These are the criteria your prospective lender uses to determine whether to make you a loan (and on what terms).
What are the 5 Cs of credit that lenders look for when reviewing a borrower? ›
Character, capacity, capital, collateral and conditions are the 5 C's of credit. Lenders may look at the 5 C's when considering credit applications. Understanding the 5 C's could help you boost your creditworthiness, making it easier to qualify for the credit you apply for.
Bottom Line Up Front. When you apply for a business loan, consider the 5 Cs that lenders look for: Capacity, Capital, Collateral, Conditions and Character. The most important is capacity, which is your ability to repay the loan.
What does CS stand for in mortgage? ›
Credit, Capacity, Capitol, and Collaterals are the four important Cs in the mortgage world and the most looked-at factors by banks when it comes to loan approval. So, what do each of the 4Cs mean, and why are they so important? Let us take a look.
What does CS mean in loan? ›
Most lenders use the five Cs—character, capacity, capital, collateral, and conditions—when analyzing individual or business credit applications.
What are the six basic Cs of lending? ›
The 6 'C's — character, capacity, capital, collateral, conditions and credit score — are widely regarded as the most effective strategy currently available for assisting lenders in determining which financing opportunity offers the most potential benefits.
What are the Cs of consumer lending? ›
The five C's, or characteristics, of credit — character, capacity, capital, conditions and collateral — are a framework used by many lenders to evaluate potential small-business borrowers.
What are the four Cs of lending a loan officer will look at to determine if you will be approved for a loan? ›
A loan officer will use the four Cs of lending to determine if you will be approved for a loan. The four Cs of lending are Character, Capacity, Collateral, and Conditions. The loan officer will assess these four factors to determine the borrower's likelihood of repaying the loan.
What are the 7 Cs of lending? ›
The 7 “C's” of Credit
- Capacity. Do I have experience running a business? ...
- Cash Flow. Is my business profitable? ...
- Capital. Do I have sufficient reserves, or other people who could invest in the business, should unexpected problems or hard times arise?
- Collateral. ...
- Character. ...
- Conditions. ...
- Commitment.
The 7Cs credit appraisal model: character, capacity, collateral, contribution, control, condition and common sense has elements that comprehensively cover the entire areas that affect risk assessment and credit evaluation.
