The 4 C’s of Approval
Getting approved for a mortgage means you’re one step closer to achieving your homeownership dreams. But do you know what’s required for approval? Below are four key components of approval, all beginning with the letter “C.”
1. Credit
The first C stands for Credit. We want to determine the quantity and quality of a borrower’s credit obligations. Lenders use past credit history as a future predictor of how the buyer will handle their credit obligations going forward. Generally, we are looking for a two-year history of good credit.
We evaluate credit scores to evaluate a borrower’s credit history. A credit score can be defined as a snapshot of someone’s credit. The score considers negative credit such as late payments, judgments and collections. It also examines outstanding debt, including how long accounts have been open and applications for new credit. Research has found there is a strong correlation between credit scores and mortgage delinquencies.
2. Capacity
The second C is for Capacity. The lender considers the amount and the stability of the borrower’s income. Based on their experience with other borrowers, the lender assumes that the applicant can safely spend a certain percentage (i.e. 28%) of his or her income for housing costs.
Housing costs include the repayment of the loan as well as expenses for property taxes, homeowners insurance, homeowners association fees and in some cases mortgage insurance.
Generally, a two-year history is considered sufficient proof of the stability of the income.
With corporate relocation, a lender occasionally must verify a borrower’s new income once they have moved to their new location if the borrower is using that new income to qualify for the loan.
3. Capital
The third C is for Capital. The lender is going to make a large, long-term investment and will ask the borrower to share in that investment. The lender will look to determine that the borrower has sufficient funds to cover the borrower’s down payment, settlement costs and cash reserves.
The minimum investment on the borrower’s end will depend on the program. While several program options exist that offer small or no down payment, any upfront investment the borrower is making must be documented.
These funds can come from:
- Bank Accounts
- Net Equity in Their Current Home
- Stocks and Bonds
- Company Retirement / Savings Plans
- Cash Value of Life Insurance
- Gifts – We will need to see the transfer of the funds and proof of donor’s funds
4. Collateral
The fourth C is for Collateral. We want to determine if the property is a safe investment for our loan. We do this by requiring such things as an appraisal, an inspection, a survey and title work.
The goal is to determine whether the property could be sold to fulfill the mortgage if the borrower defaulted.
When the borrower’s circumstances meet the guidelines of the loan program for which they are applying, their loan is approved for a specific time period, provided the borrower’s circumstances and the structure of the loan don’t change.
If you have questions and need a fast response for most mortgage-related questions or escalations, email [email protected].