 What lenders look for in borrowers?
Mortgage lenders analyze four important factors when deciding whether to loan you money or
not. These criteria are known as "the four C's":
- Credit
Mortgage lender determine if you are a good credit risk based on your credit history. At the beginning of the loan process they order your credit report. Your credit report is picture of your past and present debt, current available credit limits and a rating of your debt repayment history.
- Capacity
Mortgage lenders are concerned wether you have enough income to repay the mortgage and still have enough cash left over to live on? The underwriter adds the proposed monthly housing payment (mortgage + property tax & insurance) to your other monthly debts (credit cards, auto loans, student loans, etc.) and divides your total monthly debts by your gross monthly income.
Example: The proposed mortgage payment is $1,000 per month, you have $700 per month in other debts, then your total monthly debt load would be $1,700 per month. If your total gross income is $5,000 per month, your "Debt-to-Income" (DTI) ratio would be 34% ($1,700/$5,000 =0.34).
The standard "Fannie Mae" guideline suggests that your total DTI should not exceed 36%. Some mortgage lenders would allow to push that figure to 40% with "compensating factors" such as a large down payment and an excellent credit history.
- Collateral
Collateral is the value of the property you want to purchase or refinance. The mortgage lenders need an appraisal report to confirm the value of the property you are "pledging" as collateral for the mortgage. If you fail to repay your mortgage, the lender will seize your property and sell it at a foreclosure auction to satisfy the debt.
- Character
The mortgage lenders are concerned about the overall financial situation of the borrower. They look at the borrower's job stability, the probability of his continued employment, and his ability to handle credit wisely.
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