How a Lender Reviews Your Mortgage Application
Most of us have filled out a mortgage application at one time or another. Have you ever wondered what they are actually looking for when going over your application? If you’re currently looking to purchase a home, it might be helpful to understand how a lender reviews your information. Even if you’re not in the market for a home now, the information will likely prove useful in the future.
You may have heard of the the 5 ‘C’s of credit. These are the primary attributes your lender examines when making a decision to extend a mortgage to a borrower.
The 5 ‘C’s:
1. Character
This quality can be somewhat subjective and is the general impression a lender has of you. The lender simply asks herself, “Do I believe this person will be able to pay back this loan?”. Other factors include your education, employment, and residence history. The most desirable candidates have a higher education, a steady employment history, and have lived at their current residence for at least 5 years.
2. Capital
Capital is your down payment and your net worth. The more that you have invested in the property, the more confident the bank is that you’ll make your mortgage payments. This makes sense, because you potentially have more to lose if you lose the house. It also makes it easier for the bank to recoup its investment if you do default. The greater your net worth, the more able you are to adhere to the conditions of the loan in the event that you lose your job. This is yet another reason that saving money is important to your future. Keep building your net worth.
3. Credit
We are all familiar with credit history and credit scores. These two items attempt to predict the likelihood that you will make your mortgage payments. Your credit score is largely determined by consistently paying your bills on time and by not using too much of the credit that is available to you. Credit is difficult to improve quickly, so it is important to be diligent in paying your bills on time, always. Most banks have minimum credit score requirements, but they are not 100% set in stone.
4. Collateral
Collateral means security to your lender. In most instances, the home you’re purchasing is the collateral. The bank wants to be sure that it can recoup its money if it is forced to foreclose on the property. The amount of your down payment affects the amount of collateral the bank has. The bank would rather lend $75,000 on a $100,000 property than lend $90,0000 on the same property. The more equity in the home, the more likely the bank is to approve the loan.
5. Capacity
Capacity is the determination of how capable you are of repaying the loan. This is largely determined by your income and your expenses. There are various ratios that lenders use to evaluate your capacity. A person with a high income and low expenses is more likely to be able to make the required payments. The amount you want to borrow is very important in determining your capacity.
Applying for a mortgage is not as mysterious as it seems. All lenders use the 5 ‘C’s in some fashion to determine whether or not to approve a mortgage. Be sure to improve these five factors to the best of your ability before seeking a home loan. The more you can improve your application, the more likely you are to be successful. You will also get your loan at the best possible rate.
Melissa Wood contributes as an editor at RateSupermarket.ca. Obsessed with finding small ways to save money every day, she enjoys sharing her frugal lifestyle to the MoneyWise Blog. Read more about Melissa on her Google+ page.
Category: Mortgage
