The Importance of Credit When Applying for a Mortgage

How five C’s of credit help home buyers prepare for a mortgage agreement

It is all too easy to find yourself lost in the technicalities and requirements of applying for a mortgage. Buying a home is stressful enough, but there are reliable tips to aid those searching for simplicity in the mess of information available.

The Five C’s of Credit

Let’s focus on the Five C’s of credit. These qualities of a credit report will determine the likelihood of a lender to administer a loan to a buyer. They are character, capacity, collateral, capital, and conditions. Having an understanding of what each of these look like on a buyer’s credit report will help them make more confident decisions in their process of finding a home.

A person’s credit character is determined by things like their overall credit score, how frequently they pay balances on time, and how many credit accounts are in their name with good standing.

Capacity is a person’s ability to repay a mortgage loan on time. Factors playing into this judgment will be employment history and status along with recorded income. Prepare to submit tax returns and bank statements for a lender to complete this assessment. Another factor is the buyer’s DTI ratio or Debt to Income. A buyer must be able to meet all monthly debt obligations while still paying a mortgage and maintaining the home.

When lenders are looking into potential collateral, they are looking for assets that can cushion their losses in the event a homeowner cannot continue to pay their mortgage. Collateral is typically set to be the home itself.

Capital refers to the money and assets a buyer has left after purchasing a home. While houses are usually the most expensive asset a person will buy in their life, banks and lenders do not want a person draining every penny they have in order to purchase a home. The capital requirements vary from lender to lender.

While the buyer has control over the other four C’s, the fifth revolves outside conditions more specific to the home rather than the person purchasing it. Lenders will look at the conditions surrounding the home; if the home is valued appropriately, the cost of living for the property, how many homes are selling in the general area of the property, appropriate interest rates etc. This fifth C, while not specific to the buyer, will benefit them by securing the idea that the property was a good investment.

The main thing mortgage lenders are looking for when vetting potential clients for a loan is proof of responsibility. If a buyer can pass all 5 C’s of credit, lenders are more likely to feel confident supplying a loan to that buyer as they have proven their ability to manage the finances of a home. If your credit card company trusts you, it is likely a lender will too.