When applying for a mortgage, most people think that they have an extremely good chance at getting a mortgage without thinking about why they think they have a good chance. Most people think that they would be a good applicant if they make a lot of money, or if they have a good amount of savings. This isn’t always the case and several different elements go into factoring if you will qualify for a mortgage.
The 5 C’s of Credit
Similar to the 4 C’s of diamonds, lending has a similar set of C’s. They are as follows:
- Capacity: This is the maximum amount that a person is able to borrow and still be able to live successfully without overextending themselves. These numbers are commonly referred to in terms of ratios. Some common ratios include total debt service ratio (TDSR) and gross debt service ratio (GDSR).
- Capital: This is the amount of money or liquid assets that one has available. This is commonly referred to as someones net worth. Net worth is calculated by subtracting someones assets from their liabilities. This will inform someone what a persons available equity at any one point in time.
- Collateral: In terms of a mortgage, this refers to the property that is placed up for collateral if the borrower cannot fulfill their debt obligation. The bank commonly puts a lien on the property, and if the borrower does not make their mortgage payments, then the bank has the legal ability to take ownership of the property. The collateral is the object that is put up, so that the borrower can borrow for the lender.
- Credit Worthiness: This is in direct reference to ones credit report. If a person makes their payments on time frequently for their debt obligations, then they are more likely to pay their mortgage payments. This is important because if someone is more willing to make their mortgage payments, then they will be a less risky person to lend to for the bank.
- Character: This element is a direct relation to where the borrower is in there life. If the borrower has children and a family, then it is more likely that they will remain at the residence for a longer period of time. If the person frequently moves and does not stay in one place, then it is more likely that the borrower will miss payments or default on the mortgage.
The 5 C’s of a mortgage tell a story of what things you should do in order to prepare for a mortgage in the future. It is best to review your financial situation often to make sure that you are doing as much as you can to make yourself worthy to borrow money from the banks.
What the Banks will look for to Lend you Money
When a banks underwriters is reviewing your mortgage application for a property, they will review over a few key areas of your mortgage application. The first thing is that you have a credit report that meets a minimum requirement. The borrower must have no outstanding collections or overdue payments as well. If the borrower does have overdue balances, then they must be updated before the bank can proceed with the application.
The second key factor is the income. The income must meet a minimum requirement for the property, and the income must be continuous for the unforeseeable future. If the income is seasonal, contract, or is not permanent, then it is likely that the bank will not approve the mortgage without a co-signor.
The third major factor is the value of the property. The property must support the value in which you are buying the property for. If the property is undervalued for what you have offered for it, then you will have to put up additional down payment in order to proceed with the mortgage application. If the house needs major repairs or is mensurable, then the bank may not even proceed with the application due to these circumstances.
The fourth major factor is the down payment. The lender must be shown by the borrower that they are willing to make a commitment to living in the residence by putting up some of their own money on the property. The down payment may be as little as 5% or 10%; however, by the bank seeing that the borrower is committed to putting up some of the lender’s own money, that they will be more at ease lending money.
This is a basic outline of what financial institution will look out when making the decision to provide you with a mortgage. There are many other factors that the bank will look at as well; however, these are the major factors that come into effect. When preparing to make a purchase of a property, make sure to review your financial situation with a mortgage professional before proceeding with placing in an offer in on a location.
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