Mortgage Market / Mortgage Process

The 4 Cs to Mortgage Loan Approval

If you are in the market for a new home, knowing and understanding the 4 C’s to obtain a mortgage loan is crucial. When you know precisely what is important to banks and how you can use it to your advantage, the chances of you being approved for a loan at a good price are much higher.

What are the 4 Cs for Mortgage Loan Approval?

Credit, Capacity, Capitol, and Collaterals are the four important Cs in the mortgage world and the most looked-at factors by banks when it comes to loan approval. So, what do each of the 4Cs mean, and why are they so important? Let us take a look.

Credit Score

Your credit score plays an enormous factor in securing a home loan. While there are programs out there that can help you out even when your score is less than perfect, it is better to keep your report clean to lock down a reasonable interest rate and monthly payment. All mortgage lenders run credit checks before approving anyone for a loan. This is done to ensure you have a good history of making your monthly payments on time and of getting an idea of how much debt you are currently responsible for paying back. Whether you are looking to buy a home now or sometime in the distant future, it is in your best interest to take a look at your current credit score and see where improvements can be made.

Capacity for Repayment

Your current monthly obligations, debt, ad income are other considerations taken by the bank when deciding whether or not to offer applicants a mortgage loan. When applying for a mortgage, your bank will ask you for

  • Proof of income (employer, self-employed, disability, etc.)
  • Length of time you have worked for your current employer
  • How long you plan on staying at your current place of employment

You will also be asked for a list of current debts you are responsible for paying back. This is to compare the money coming into the money going out of your bank account every month. If it looks like you are already limited in funds to repay your current debt, you might not be able to secure a mortgage.

Capital or Cash

Aside from the money you make weekly from your job, banks will also look at your current savings, investments, and assets to see where else cash can come from outside of your income. Having valuable assets can increase the likelihood of banks offering you a loan because it can provide a sense of security, knowing there is a way of getting their money back even if something appends to your job. Types of capital banks can consider it includes.

  • Retirement funds
  • 401K
  • Stocks
  • Bonds
  • CDs
  • Savings

You can also use “gifts” from family or friends as long as you have proof that the money was, in fact, a gift, and you do not have to pay it back. Banks will check the source of your capital, even looking over your bank statements up to six months into the past. Mortgage lenders do this to ensure the money you offer is obtained legally and isn’t a source of debt.

Collateral for Reassurance

Your new home is the collateral you are giving to the bank. Collateral is a valuable asset or property that can be taken away if your loan is not paid back. With the home being the collateral, a bank can foreclose on your house if you don’t make your monthly payments, taking it back and reselling it to recoup their losses. This can become a significant problem for the person who loses the house since they are responsible for the remaining loan balance if the new sale doesn’t cover it all.

Final Thoughts

Credit, Capacity, Cash, and Collateral are the four Cs of home loans. Knowing them inside and out and making each a priority before purchasing a home will ensure you get the best rates and repayment options out there.

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