When a lender looks at an applicant's loan request, they normally look at three charactics known as the Three C's of Credit. The three C's are character, capacity and collateral. Let's look at character. A creditor will look at your credit history and paying habits to determine your character. They obtain this information from a credit-reporting agency such as TransUnion, Equifax or Experian. It is not unusual for a lender to look at credit reports from all three credit reporting agencies. Credit agencies use credit scoring modules that reflect a three digit numerical score that is based on your borrowing habits - how well you pay your creditors and how often you apply or open credit. If your credit score is high the creditor considers you to be of better character or risk than someone with a low score. Now, let's look at collateral. The lender wants to see what you have for collateral. A borrower with more collateral (equity) has a better chance of getting a loan than someone with less collateral. Secondly, if you have more assets, pledged or not, the lender will look more favorably at your loan request. When completing a loan request, you should list all assets. The last of the 3 c's is capacity. Capacity means simply your ability to repay a loan. Lenders calculate a debt ratio to see how likely you will repay the loan. In mortgage underwriting the underwriter will look at two ratios known as your front and back ratio. Front ratio refers to your total housing expense (P&I, Taxes, Insurance) as a percent of your gross monthly income. As an example, if your monthly gross income is $4000 and your Housing expense is $1102; your front ratio is 27.55%. Back ratio is your housing expense plus all other revolving and Installment debt divided by your gross income. Applicants with lower debt ratios have a better chance of being approved and in some cases may receive a better rate.
Now, let's recap. All three C's play an important part in granting credit. Applicants with higher credit scores/ better character are more likely to obtain a loan with good terms. That is loans with lower rates and less down. Borrowers with more assets will be more likely to get financing with better terms than someone with fewer assets. Lastly, clients with low debt to income ratios are looked on more favorable. Remember, always pay on time and do not apply for credit often.
Author Resource:-
Connie Sanders is a strong advocate for educating the consumer about the mortgage loan process before they apply for a loan. Connie put together a mortgage information web site at: http://www.mortgageunderwriters.com and can be contacted there with any questions you may have.
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