Ever wonder how a lender looks at your
By Lisa J. Gryba | GoldenGirlFinance.com – Mon, 15 Apr, 2013
Lenders are in business to make money…not lose it. Consequently, when a lender approves a
mortgage application, it wants to ensure that it will be paid back within the terms of the mortgage
To assess your application, most lenders look at the 5 ‘C’s of credit…
Character is the general impression you make on your lender. The lender will form a subjective
opinion as to whether or not you are sufficiently trustworthy to repay the loan. Your educational
background and experience in business (if you are self-employed) will be reviewed. The length
of time at your current employment and your current residence are considered. The longer you
have been at both, the higher you will score on the character scale.
Capital is the money you personally have invested in the property, otherwise known as your
down payment. The more of your own money you invest as a down payment, the more likely
that you will do all you can to maintain your payment obligations. Capital is also reflected by
your ability and willingness to save money and accumulate assets. The higher your net worth, the
more you have as a cushion for repayment in the event that you run into a financial setback.
Credit is the evaluation of your habits in performing credit obligations. The information about
your credit history is stored at both Equifax and TransUnion credit agencies and indicates how
well you have paid your bills over the last 6 years. All major credit cards, auto loans, leases, etc.,
are reported to the credit bureau. A lender will evaluate your ability to maintain your obligations
and try to determine how well you live within your means. Some individuals make the mistake
of not paying the minimum monthly obligations on loans and credit cards with the expectation of
making a large payment the following month. These missed payments appear on their credit
report branding them as “late payers” for the next six years.
Collateral is additional security that you can provide to the lender. In real estate transactions, this
generally means the property. If for some reason you cannot repay the mortgage, the bank wants
to know that the real estate the mortgage was taken out on is of sufficient value and in demand.
A real estate appraisal will determine the value of the property being financed and any
discrepancies that may affect the ability to resell the property in case of default. Generally, a
property that is located within the city is considered a better risk than a farm in a rural area.
Simply put, there are more buyers for the home in the city than for the rural farm and therefore it
is easier to sell.
Capacity refers to your ability to repay the loan; this is typically the most critical of the five
factors. The lender will want to know exactly how you intend to repay the loan. The lender
considers your income and existing expenses, including the new loan payment. If you have the
capacity to make an additional payment (the monthly carrying costs of the loan), then the
probability of you successfully repaying the loan is fairly high.