Credit History. Capacity. Capital. Collateral: These are the 4 C’s of credit. Lender’s use this when reviewing your mortgage application to determine whether you are a good candidate to lend a mortgage to.
If you understand the “4 Cs” the further ahead you’ll be in getting the financing you need.
Your credit history is very important to lenders. By reviewing your credit history, lenders will be able to see just how well you are managing the debt that you currently have.
Are you consistently paying your bills on time? Are you earning enough each month to make your payments? Before adding another debt to your plate, mortgage lenders want to see that you are making an effort towards being debt-free.
Lenders will then look at your capacity, which is how much money you have earned compared to your recurring debt. Lenders want to see that you have enough money coming in each month in order to cover your current debts.
What is your ability to repay the loan? Do you have a job or another source of income? Have you held your job for a length of time? Do you have other debts?
Lenders may ask for certain documents, such as income statements, tax returns and your history of employment in order to verify that you are reliable enough to take on a mortgage loan.
If you are self-employed you will have to provide the last two years’ tax returns (personal and business), a Profit and Loss statement, and a Balance sheet for the current year.
Lenders will also look at your capital, which is how lenders can confirm where your money is held and how long you’ve been saving it. Basically, it’s a way for them to confirm that you have the cash you’ll need for the down payment and closing costs.
You will have to provide two months of complete statements for any asset accounts containing your cash-to-close including checking, savings, retirement, and investment accounts.
A lender takes a huge risk when they decide to loan someone a mortgage, so it makes sense that they want to make sure if they lend you a mortgage, you will pay it back and pay it back on time.
But what happens if a borrower can’t make their payments? Does the lender lose all of that money they lent to the borrower? If you fail to repay the loan, is there something of value that you agree to forfeit?
Collateral acts as a form of security for the lender that if the borrower were to default on their loan, they wouldn’t lose out on that huge sum of money.