Applying for a mortgage is an essential (sometimes overwhelming) part of buying a house. You can achieve success and a smooth-sailing mortgage underwriting procedure by knowing what lenders search for - the four C's of credit. The size of the mortgage loan you can qualify for is determined by the four C's of credit if you're looking to buy a home in a more affordable area.

What are the four C's of credit?

1. Credit: Have you been making timely payments in the past?

2. Capacity: Can you afford to repay the loan?

3. Capital: Do you have savings, investments, or other forms of financial preparation?

4. Collateral: What assets can you use as collateral for the loan?

Lenders consider and analyze four critical components during the mortgage underwriting process, regardless of their criteria for obtaining a home loan. These essential factors are credit, capacity, capital, and collateral.

Let's take a closer look at the four Cs of credit.

Credit

Lenders will assess your credit score to analyze your payment habits when considering you for a mortgage. When you apply for a mortgage, the lender will look at your credit report and other financial information to determine your qualifications for the loan. They'll want to know everything about your previous borrowing history, including how well you've paid back your debts in the past.

Your credit score may be the key to whether or not you get approved for a mortgage loan. In many cases, the minimum credit score for a mortgage is required, and your credit score may influence the loan amount you're approved for and the interest rate.

Capacity

A potential borrower's capacity to repay the loan is known as 'capacity.' A mortgage lender will evaluate your income, savings, job status, history, and any other financial obligations (such as a car loan or student loans) to assess your debt-to-income ratio (DTI) and determine whether you are suitable the mortgage. A loan applicant's DTI (debt-to-income) ratio is usually inversely proportional to the risk they pose; the lower their DTI, the better.

To verify your earnings, lenders will look at your previous W2s, income tax returns, and present income statements. You may anticipate that your payments will be evaluated based on the following criteria:

• The source and type of income

• The length of time since the payment was received

• The income's prospects and stability

Lenders will then examine your recurring monthly debt payments, such as:

• Car loans

• Loans for students

• Loans for individuals

• Payments made with a credit card or a line of credit

• Costs for a child or spousal support

• Other obligations and debt payments, e.g., medical bills

However, because you've been given a specific amount for a mortgage does not necessarily imply that you can afford to buy a property at the top of your price range, according to Lisa Behm, a mutual bank in Cleveland.

Capital 

Lenders not only look at your income when giving you a loan, but they also investigate how much money you have saved up and where it is invested. It could include stocks, 401(k)s, IRAs, etc., known as cash reserves. Lenders not only want to see that you have the income to cover your mortgage payment each month but also that you have additional savings for your down payment and closing costs.

          

Not only will cash reserves be taken into consideration by lenders, but here are a few other sources of capital:

• Down payment assistance programs

• Gifts from a relative

• Grants

For example, you can use your bank card or credit union monthly statements to quickly verify and track account balances. Be aware that finances will be under scrutiny from starting the application process until long after you move in. "Condon continues, saying that more moves inevitably mean a higher degree of tracking, leading to a long process.

Collateral

Collateral refers to the borrower's assets that can be used as security against the loan. The home you're purchasing with a mortgage loan functions as collateral. 

 

If you fail to repay the loan, the lender has the right to repossess your home. The value and perceived liquidation ease of collateral is often measured. For example, when a homebuyer wants financing from a bank or mortgage lender, they will order a home appraisal to determine the home's value.