The 5 C’s of Credit
Think back to your first job interview. Did you research the company before? Did you think of answers to questions that might be asked? If you’re the least bit successful, you are probably answering yes to these prior questions. Odds are – you went in highly prepared.
Now think of the first time you wanted to purchase a house. How much did you prepare before you approached the bank looking to get preapproved for financing? Did you treat the mortgage application process the same as the job application process? Odds are – no. But you should have.
Here’s a helpful tip that will prepare you for your next loan.
Think of a loan application as an interview. The person conducting this interview is the loan officer. This loan officer will figure out what loan is best fit for you, get to know you, and input all of your information into some sort of application. The loan officer (typically) will have no say as to whether you’ll be approved or not. You can sweet talk this “suit” all you want, but his power is limited.
The application is sent from the loan officer to the underwriter. The underwriter is the decision-maker in this financial family. So how do you get approved for a loan?
Think like an underwriter.
An underwriter wants to make sure you’re qualified for whatever loan you’re taking out. Unlucky for you, the underwriter doesn’t get paid on how many loans he approves. The more money a bank lends out, the more money a bank makes; however, this underwriter doesn’t give a rats ass whether you’re the one getting the money or not. If you know what he’s looking for, you’ll greatly improve your chances. So what does an underwriter look at?
The Five C’s of Credit
Character can be used interchangeably with Credit. The first thing an underwriter will look at will be your credit. How you have paid your bills in the past says a lot on how you’ll manage your bills in the future. Would you loan five dollars to someone that has never paid anyone back?
Remember DTI. DTI stands for Debt-To-Income. Take your monthly income and divide it by your monthly obligations (These are payments showing on your credit report. Cable, internet, and food aren’t included). This ratio should be under 40% to be on the safe side.
Side tip: Typically won’t be able to use self-employment income unless you have been in business for 2 years. (Tax returns will reflect this)
Capital is what the borrower has on hand for down payment, closing costs, and in reserves (liquid assets). Not much to say here…Just remember to have enough for a down payment to avoid PMI.
What is the loan being secured by? If you fail to repay to loan, what will the bank take of yours? It will matter whether it’s a single family home, a condo, or an investment property. There are specific rules for everything.
Most important here is LTV – Loan To Value. In the mid 2000s, an individual was able to borrow outrageous amounts of money. If a property was valued at 200,000 – the borrower could finance 100% (in some cases more). This worked because property values were expected to increase – forever.
Traditionally, you’ll be asked to put 20% down, or in some instances (FHA) you can borrow up to 97%.
Does everything add up? Does everything make sense? The underwriter will review all disclosed (and undisclosed) variables that might adversely affect the borrower or property.
Did you already know the 5 C’s of Credit?
photo credit: 401(k) 2012