Hi all: How are you? I was thinking this morning about the 4 C’s of Lending.
Here they are. Credit, Collateral, Character, and Capacity. What do I mean by each?
1) Credit is fairly obvious. Your credit score will determine in large part the rates, terms and type of loan you have. On a residential loan, your best rate will often be if you have either a 740+ credit score for a conventional loan and a 640+ credit score for an FHA or VA loan. Credit scores less than 640 can get loans for FHA, VA or USDA but expect additional requirements to be added in most cases. The bottom line is this. If you’ve been paying your bills on time the last year or so and don’t have maxed out credit cards, your credit score should be ok; enough for you to qualify for a home loan if everthing else lines up (job, income, etc.)
2) Collateral refers to what you either have in the way of assets or equity in your existing residence. Gone are the days of no down loans (the exception is the USDA rural loan program and some local state bond programs) and 100% loan-to-value loans. You have to bring something to the table.
3) Character is really about who you are. I will occasionally field phone calls from borrowers trying to beat the system. Whether it’s buying a second home within 50 miles of your primary residence and trying to get a second home loan rate (this should be an investment property rate per Fannie Mae guidelines) or some other scheme to circumvent the system, character matters. The lenders these days didn’t just fall off the turnip truck. They check and verify and you need to be honest with everyone about what you intend to do. In fact, I’ll be a little more blunt. Please don’t call me with your schemes. In the old days, character mattered. A handshake and a look in the eye meant something. Nowadays, lenders don’t always have the ability to marshal a loan through if you’ve made a mistake (short sale for example within the last 2 years) but we do consider who you are as a part of the loan approval process.
4) Capacity refers to how much you can borrow. It’s interesting how the 4 C’s of lending point right back to how well you manage your credit. This was the way it was in the old days and we’re almost back to that point now if not already.
There you have it. Credit, Collateral, Character and Capacity are key in the lending process. Thanks for reading and good luck if you apply for a loan. We approve loans every day but I’d like to think we know what we’re doing here. Have a great day!