4 C's of Lending
What You Should Know Before Buying A Home
To be able to qualify for a loan to purchase a home, lenders review your 4 C's - Capacity, Credit, Capital and Collateral - to
see if you are able to repay the loan. The following is a brief summary of the 4 C's.
Capacity is your ability to repay a mortgage loan based on your income and work history.
Consider the following:
-Do you have the ability to repay the loan?
-Do you have a stable income that is likely to continue?
-Do you have enough income to meet the mortgage payment expenses?
Mortgage principal, interest, taxes and insurance should not exceed 28% of your gross monthly income.
Mortgage principal, interest, taxes and insurance; as well as recurring monthly debts, such as auto loans, credit and
revolving credit card payments should not exceed 36% of your gross monthly income.
Gross Monthly Income includes any additional income from overtime, part-time employment, bonuses, dividends, interest,
royalties, pensions, Veterans Administration compensation, net rental income, etc., and other income such as alimony,
child support, sick pay, social security benefits, unemployment compensation, income received from trusts, and income
received from business activities or investments, workers compensation, and disability.
-Do you have the ability to go from the present rent payment to the proposed house payment?
-Does your present financial lifestyle allow for a savings pattern for unforeseen housing expenses?
Credit is the confidence in your ability or intention to fulfill your financial obligations. Your credit report will be reviewed to
make this determination. To prepare; request a copy of your credit report from the credit bureau. Review the report and
check it for any errors. If there are errors take this opportunity to clear them up. Should you have credit problems start
working on them now. By working with your creditors, your report will eventually indicate a healthy credit climate and you
may be ready for a mortgage. If you do not have any credit accounts this may be held against you. However, some
lenders will allow for alternative credit, which reflects the manner in which you have paid your utilities and car insurance,
including any past rental or mortgage history. READ: The Credit Grade Guide.
Capital is defined as wealth such as money or property accrued by an individual indicating the amount of money you have
saved to cover down payment or closing costs and includes: Checking Accounts, Savings Accounts, Insurance Policies,
Gifts, IRA or Keogh Accounts, 401(k), stocks, bonds, proceeds from the sale of existing property, real or personal.
Collateral is defined as property acceptable as security for a loan or obligation, which in this case would be the home you
are buying.