Shopping for a home is
stressful. Shopping for a mortgage to buy that home with, can be
even more stressful. The stress we feel when waiting to hear from a
lender on whether or not our mortgage request has been approved is
caused by not knowing what the lender is doing when they are
deciding whether or not to offer a mortgage loan to us.
Understanding what logic is being used and what a lender is looking
for can go a long way in not only relieving that stress but to
helping us get our mortgage loan approved. When a lender is
considering a mortgage loan request it is commonly referred to in
the lending industry as underwriting the loan.
Underwriting is the process
of checking all of the information that goes into a loan application
with all of the support or proof documentation that will be
required, pay-stubs, w-2’s, etc. Underwriting also includes how a
lender considers these documents. In general this "how" is known as
the 3 C’s of credit.
The 3 C’s of credit
comprise our entire financial life and stand for Character,
Capacity and Collateral. The lender considers each of these 3
C’s when they are underwriting our mortgage loan request.
The first C of credit,
Character, is a measure of what kind of credit we have been
extended in the past and more importantly whether or not we have
paid that credit back in a timely fashion. Character is by far the
most important of the three c's. The lender also ranks the
importance of each of our existing and past debts when measuring
capacity. In descending order the most important credit we can have
is a mortgage, followed by installment loans, such as a car or
personal loan, revolving loans, such as credit cards, and then all
other loans. A mortgage lender is primarily going to be concerned
with whether or not we have made our mortgage payments on time and
then consider the other loans.
The second C of credit,
Capacity, is a measure of how much income we have versus how
much debt we have. In this case debt is broken down into two
categories. First, the mortgage loan size and resulting payments and
second, all other debts and their resulting payments. In general
lenders allow mortgage borrowers to use between 28% and 35% of their
gross-pretax income for mortgage payments and 33% to 45% for all
debts including the mortgage.
The third C of credit,
Collateral, is a measure of the size of our down-payment in the
event of a purchase and in the event of a refinance it is the amount
of equity we have in our home. In general, the larger the
down-payment or the greater the equity we have in our home the more
attractive the rates and terms we will be offered by the mortgage
lender.
Each of these three C’s of
credit is viewed by the lender independently as well as
collectively. What is most important to note here is that there are
now over 2,000 different mortgage loan programs available and each
of these programs has a different set of guidelines for analyzing
the three C’s of credit for borrowers. There are loan programs
designed for self employed individuals whom can not verify their
income with typical tax returns and pay-stubs, loans for borrowers
with past and even current credit problems; as well as many more.
However, regardless of what type of mortgage loan program is needed
by an individual borrower all loan programs have guidelines for
analyzing the three C’s of credit. Making sure you present your loan
request properly and with an understanding that these three C’s of
credit are what will be considered will go a long way to relieving
the stress we feel when waiting to here from a lender on whether or
not our mortgage request has been approved.
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