The 4 Cs in Lending

April 23, 2015

The 4 Cs in Lending

If you are a homebuyer, you should all know that there are certain requirements that lenders are looking for. Freddie Mac, the mortgage giant, shares about this information to let potential homebuyers be informed of the factors that lenders are looking for when evaluating an application whether a loan will be granted or not.

According the Christina Boyle, SVP and Head of Single-Family Sales and Relationship Management of Freddie Mac, “although owning a home isn’t for everyone, and renting might be a better option for some, keep in mind the following facts if you choose to pursue homeownership.”

Sure, you have enough cash to pay for the down payment, but there are still other factors to consider before you are considered eligible for a loan. Credit standards all across the board are higher now than they were decades ago, but if you look closely they are actually still the same as in the mid-1990s. Affordable mortgages are within reach for many qualified borrowers, other factors include today’s very low interest rates and current home prices.

Here are the 4 Cs that lenders are looking for before handing out the loan:

Capacity – this factor is highly important because this is the area where it means that you have the ability to pay back your loan looking at your current and future financial status. This includes the following:

Income - as a general guideline, your monthly mortgage payment should not exceed 28 percent of your gross monthly income.

Employment history – this provides your income stability whether or not you are jumping from one employment to another. This also goes with character as the length of your employment measures your financial stability. Who would actually be willing to give you a loan when they see that you are unable commit into working for certain company unless you have been promoted?

Savings – this is considered that you have enough financial capability to be able to pay the loan back and have a fall back in case of financial emergencies.

Monthly debt payments – factor to ensure that you are able to manage and control your finances well.

Collateral – The value of the home that you intend to buy. The better the shape of the home and the higher the value of the home compared to the amount you are paying for it, the better or otherwise called as the Loan to Value Ratio.

Capital – these are the money and savings that you have on hand including investments, properties and other assets that could be liquidated fairly easy for cash. This serves as a proof that you can manage your money and have funds, aside from your income, to help pay the debt.

Credit – this has been discussed in one of my previous blog. Credit history plays an important role when it comes to applying for a mortgage. It could take months or even years before you are able to fully repair your credit, in case that your credit rating has gone just below the standard rate. Whether or not you plan on purchasing a home in the near future, it is always advisable and a good idea to build and maintain a strong credit. This does not only apply for mortgage applications, it also applies to other financial matters such as applying for other credit line, student loan, car loan or credit card.

Although, of course down payment still plays an important factor such as this is one of the reason why you have decided that you will purchase a home, this is also a qualifying piece that lenders consider. With the new mortgage qualifier that Freddie Mac and Fannie Mae had just launched back in early December 2014, first-time home buyers can now have access to mortgage with as little as 3 percent down payment. This is good especially to those who have steady income but has little savings.

Just like a diamond has its 4 Cs buying guide, home buying process also has its 4 Cs. It is best that everyone is in the know of what are the general standards lenders usually based their decisions with in order for potential home buyers to qualify and get the home they have always wanted to have. Seek the advice of professionals such as real estate agents so that you can be able to have better understanding and greater chance of owning that dream home of yours.

Source: http://realtormag.realtor.org/daily-news/2015/04/15/what-lenders-are-looking-for-4-c-s?om_rid=AAErMs&om_mid=_BVLo6JB9Az8wpQ&om_ntype=RMODaily