Home Mortgage Loan Basics | C2 Financial Corp (2024)

FAQs

What are the 3 C's of mortgage lending? ›

The Three C's

After the above documents (and possibly a few others) are gathered, an underwriter gets down to business. They evaluate credit and payment history, income and assets available for a down payment and categorize their findings as the Three C's: Capacity, Credit and Collateral.

So, what do lenders look at when deciding to approve or deny an application? 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?

Making a Late Payment

Every late payment shows up on your credit score and having a history of late payments combined with closed accounts will negatively impact your credit for quite some time. All you have to do to break this habit is make your payments on time.

The underwriter will go over your finances, including your credit score and report, employment history, debt-to-income ratio, assets, income and the mortgage and down payment amounts.

A 20 percent down payment may be traditional, but it's not mandatory — in fact, according to 2023 data from the National Association of Realtors, the median down payment for U.S. homebuyers was 14 percent of the purchase price, not 20.

The underwriter will review your application, credit history, and income to assess the viability of your loan. Your lender may also have extra questions throughout the FHA loan underwriting process. Minor problems that the underwriter finds may need a letter of clarification and perhaps other measures on your part.

The Underwriting Process of a Loan Application

One of the first things all lenders learn and use to make loan decisions are the “Five C's of Credit": Character, Conditions, Capital, Capacity, and Collateral. These are the criteria your prospective lender uses to determine whether to make you a loan (and on what terms).

You have an income shortfall

If your DTI is too high, you may be rejected for a mortgage. Most lenders require a DTI of less than 43 percent, with 50 percent the max. Aim for your obligations comprising about one-third of your income: A DTI around 36 percent is the ideal, qualifying you for better loan terms.

Do mortgage lenders look at your spending? ›

Mortgage lenders will often look at your spending habits to determine if you are a responsible borrower. They will look at things like how much you spend on credit cards, how much you spend on groceries, and how much you spend on entertainment.

You can usually get a feel for whether you're mortgage-eligible by looking at your own personal finances and assessing your financial situation. You'll have the best chances at mortgage approval if: Your credit score is above 620. You have a down payment of 3-5% or more.

Some types of mortgages have specific minimum credit score requirements. A conventional loan requires a credit score of at least 620, but it's ideal to have a score of 740 or above, which could allow you to make a lower down payment, get a more attractive interest rate and save on private mortgage insurance.

The minimum credit score needed for most mortgages is typically around 620. However, government-backed mortgages like Federal Housing Administration (FHA) loans typically have lower credit requirements than conventional fixed-rate loans and adjustable-rate mortgages (ARMs).

The factors that determine your credit score are called The Three C's of Credit – Character, Capital and Capacity.

For example, when it comes to actually applying for credit, the “three C's” of credit – capital, capacity, and character – are crucial. 1 Specifically: Capital is savings and assets that can be used as collateral for loans.

Called the five Cs of credit, they include capacity, capital, conditions, character, and collateral. There is no regulatory standard that requires the use of the five Cs of credit, but the majority of lenders review most of this information prior to allowing a borrower to take on debt.

Your monthly mortgage payment typically has four parts: loan principal, loan interest, taxes, and insurance.