Five Cs of Credit - What Lenders Look For

Your credit score matters, a lot. Good credit shows you pay your bills on time and pose a minimal risk to financial lenders.

Your credit is how you get the best credit cards, the lowest insurance premiums, and the most favorable interest rates on loans.

It literally pays to have good credit.

How do you get good credit, though? A lot of people have the vague idea that good credit just comes from having some debt and paying it off on time. This is true to an extent, but you can also build up credit by keeping your credit utilization low and minimizing your requests for more available credit.

But it might surprise you to learn that the simple number of your credit score is not all lenders look for when deciding whether to approve you for a mortgage. There’s more that goes into that decision.

In fact, there are five “Cs” that lenders consider when reviewing your creditworthiness to give you a loan: character, capacity, capital, collateral, and conditions. Different lenders weigh these five Cs differently; where one might put more weight on character, another might see capital as more relevant.

Let’s learn about the Cs in this post. That way, you can better prepare yourself to get approved for home loans in Arizona through Castle Rock Mortgage LLC.

The First C - Character

The first C is character, and despite what it sounds like, this isn’t an intense analysis of you as a human being. It is moreso a look into your credit score, from which lenders can tell how financially responsible you are overall.

Many lenders will use your FICO credit score to get a quick peek into your creditworthiness before diving more deeply into your credit history. FICO scores can be as low as 300 or as high as 850, with the higher numbers being better.

High credit scores indicate that you pay your debts mostly on time and have done so for years. High scores mean you are less of a risk than someone with a low score. If you have a credit score on the high end, say 700 to 850, then you stand to get the lowest interest rates and best repayment terms on mortgages and other loans.

Lower scores will get you high interest rates and less favorable conditions, or no loans at all.

The Second C - Capacity

Next up is capacity, which simply refers to your ability to pay back a loan. And if we’re talking about financial capacity, then we mean your income, employment status, job history, and debt-to-income, or DTI, ratio.

DTI matters to lenders because they want to know whether you’re able to pay off the debts you already have before taking on more. Lenders add up all your debts and divide that number by your gross monthly income to arrive at your DTI ratio. The lower the percentage, the better off you will be.

Your income and employment history obviously matter in the capacity category, as well, but DTI stands tall here. Some lenders absolutely will not lend to individuals with DTI ratios over certain numbers.

The Third C - Capital

The third C refers to capital, or the total amount of assets you have to your name, as well as the amount of money you place as a down payment on your mortgage. Your assets are everything of value that you own, such as cash, investments, properties, and the like.

It matters to lenders what your total assets are because they want to know what resources you currently have to work with to pay off your loan.

The down payment you pay on the property you want to buy with your mortgage weighs heavily here, too. A larger down payment will generally grant you better terms on your mortgage, as in, lower interest rates and better terms.

Also, simply from a human standpoint, a larger down payment shows you are more personally committed to owning the property and paying back your mortgage. Consequently, that makes you less of a risk to the lender.

The Fourth C - Collateral

Another essential C here is collateral, or the physical object that is used to secure, or back up, the loan. Collateral is there to let the lender know that, should you fail to repay your mortgage, that valuable object is there to be possessed and offloaded for the remaining loan amount.

In the case of a mortgage loan, the house itself is usually the collateral. It’s relatively simple: if you can’t pay your mortgage, the bank takes your house and sells it. This is called foreclosure.

A mortgage loan supported by collateral is known as a secured loan, and for obvious reasons, it is a less risky loan to make. That’s why secured loans usually come with lower interest rates and better terms for the borrower.

The Fifth C - Conditions

The last C here is conditions. This refers to the specific circumstances surrounding your mortgage loan, meaning the amount of principal and interest, how you plan to use the money, the status of the economy at the time, and any incoming political shifts that may affect the way money can be loaned.

It is a bank’s job to profit from borrowers while shielding itself from financial risk along the way. Economic and political conditions can change the financial markets and borrowers’ abilities to repay a loan. Banks also know that desperate borrowers are risky borrowers.

That’s why lenders analyze the individual conditions of your loan at the time you request it to determine if you are indeed creditworthy enough to provide with a mortgage.

Get Approved for Your Mortgage Loan with Castle Rock Mortgage LLC

As you have learned, these five Cs of credit help lenders to get a relatively complete picture of you as a borrower. Each C contains distinct and vital information about your history and overall approach to finances. When you do your best to appear responsible to mortgage lenders, you end up getting the best loan rates and terms.

At Castle Rock Mortgage LLC, we can help you find the best mortgage lenders for you based on your current credit conditions. We will learn about you and then set you up with the most appropriate loan program in Arizona.

Contact us today to start getting approved for your mortgage!