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
Lenders consider four criteria, also known as the 4 C's: Capacity, Capital, Credit, and Collateral. What is your ability to pay back your mortgage? Factors that play into your Capacity include current income, employment history, and liabilities, such as other loans and financial obligations.
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 credit underwriting? ›
Meet the Fantastic Four - the 4 C's: Capacity, Credit, Collateral, and Capital.
What are the 5 Cs of mortgage lending? ›
The five Cs of credit are important because lenders use these factors to determine whether to approve you for a financial product. Lenders also use these five Cs—character, capacity, capital, collateral, and conditions—to set your loan rates and loan terms.
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 4 elements of a mortgage? ›
There are four components to a mortgage payment. Principal, interest, taxes and insurance.
What are the 4 pillars of lending? ›
Understanding this process will give you an edge over your competitors. Credit score, income, employment and down payment are the four pillars of the loan approval process.
What are the 4 Cs of buying a house? ›
At the end of the day, securing a home loan comes down to the four C's: credit, capacity, capital, and collateral.
What are the four Cs? ›
The 4 C's to 21st century skills are just what the title indicates. Students need these specific skills to fully participate in today's global community: Communication, Collaboration, Critical Thinking and Creativity. Students need to be able to share their thoughts, questions, ideas and solutions.
What are the four 4 Cs of the credit analysis process? ›
The “4 Cs” of credit—capacity, collateral, covenants, and character—provide a useful framework for evaluating credit risk.
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?
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.
Which of the 5 Cs is the most important in lending decisions? ›
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 are the c4 Cs of credit? ›
It binds the information collected into 4 broad categories namely Character; Capacity; Capital and Conditions. These Cs have been extended to 5 by adding 'Collateral', or extended to 6 by adding 'Competition' to it (Reference: Credit Management and Debt Recovery by Bobby Rozario, Puru Grover).
What are the 5 P's of credit? ›
Different models such as the 5C's of credit (Character, Capacity, Capital, Collateral and Conditions); the 5P's (Person, Payment, Principal, Purpose and Protection), the LAPP (Liquidity, Activity, Profitability and Potential), the CAMPARI (Character, Ability, Margin, Purpose, Amount, Repayment and Insurance) model and ...
Which is not part of the 5 Cs of the credit decision? ›
Candor is not part of the 5cs' of credit.
What are the 4 Cs when buying a home? ›
At the end of the day, securing a home loan comes down to the four C's: credit, capacity, capital, and collateral.
What are the 4 Cs of debt? ›
What Are the Four Cs of Credit?
- Capacity.
- Capital.
- Collateral.
- Character.
If you are a business owner or potential borrower, understanding the “4 C's of Commercial Lending” is your key to success. These are Capacity, Collateral, Capital, and Character. These four core components are what lenders assess to decide whether to grant you a loan.
What are the 4 Cs of financial management? ›
As owners of FP&A processes, today's accounting teams must be well-versed in the four C's of financial planning: context, collaboration, continuity, and communication. Today, financial planning and budgeting are more important than ever.
