Capacity, Credit & Collateral. What Every Lender Examines Before Approving Your Mortgage

07 Feb Capacity, Credit & Collateral. What Every Lender Examines Before Approving Your Mortgage

Anyone who needs to refinance their home or buy a new one must be ready to learn about the requirements for qualifying for a mortgage. Once you learn the basics and you are qualified for the home loan, you will be in a position to land the best deal available on the market.

As you prepare to go out and get the best mortgage deal available, you should keep in mind that the mortgage lenders will consider some factors before they can lend you the money. These factors are broken down to three C’s, and they include the following;
1. Capacity

What is your financial stability concerning the loan repayment?

Your financial status and if you can be able to repay the specified mortgage. Salaries and wages, where you work for someone as an employee, tend to be more stable that other types of income. Due to the fact, that the salary is usually the same on a monthly basis.

Most of the self-employed are less likely to get a mortgage loan, compared to the employed. The reason for this is that self-employment deliver varied income from month to month. Also, the owner of the business {self-employed} will have to put all their effort to generate income.

Loan applicants will be required to file their income with pay stubs & tax returns. Conversely, the self-employed applicants will only be needed to file their income with the tax returns.
2. Credit

Can you repay your debts? What is your credit worthiness?

This C majorly focuses on your credit score. The mortgage lender will want to know your score before they can grant you the home loan. Expect the lender to ask for credit reports from the major bureaus, which are TransUnion, Experian, and Equifax. The lender will also need to know all the related payment histories, which will help to determine the creditworthiness further. Ideally, your credit score from all the major bureaus should be above 720. Any score under 620 is considered risky.
3. Collateral

What will secure the loan you are about to borrow?

Even with income from either of the two employments, the lender will still need a security for your home loan. Usually, the property that you are financing will act as the security or collateral for your loan. For that, your lender will need to know about the type, condition, quality, as well as the value of your property.

The mortgage lender will mostly be concerned with the property’s value. This helps them calculate the risk via the LTV {Loan-To-Value} ratio. This ratio is the percentage of the property value you intend to borrow.

If the LTV or the percentage is low, then the borrower is less risky concerning the mortgage loan. Conversely, higher Loan-To-Value percentages are considered riskier.