The 4 C's of Qualifying for a Mortgage (2024)

Whether you are a first-time homebuyers or are re-entering the housing market, qualifying for a mortgage can be intimidating. By learning what lenders look at when deciding whether to make a loan, you'll be more confident in navigating the mortgage application process.

The 4 C's of Qualifying for a Mortgage (1)

Standards may differ from lender to lender, but there are four core components — the four C's — that lenders will evaluate in determining whether they will make a loan: capacity, capital, collateral and credit.

Capacity to Pay Back the Loan

Lenders look at your income, employment history, savings and monthly debt payments, and other financial obligations to make sure you have the means to comfortably take on a mortgage.

One of the ways lenders verify your income is by reviewing several years of your federal income tax returns and W-2’s, along with current pay stubs. They evaluate your income based on:

  • The source and type of income (e.g., salaried, commission or self-employed).
  • How long you've been receiving the income and whether it's been stable.
  • How long that income is expected to continue into the future.

Lenders will also look at your recurring monthly debts or liabilities, such as:

  • Car payments
  • Student loans
  • Credit card payments
  • Personal loans
  • Child support
  • Alimony
  • Other debts that you're obligated to pay

Capital

Lenders consider your readily available money and savings plus investments, properties and other assets that you could access fairly quickly for cash.

Having money saved or in investments that you can easily convert to cash, known as cash reserves, proves that you can manage your finances and have funds, in addition to your income, to pay the mortgage. Cash reserves might include:

Along with cash reserves, other acceptable sources of capital might include:

When you apply for a mortgage, the lender may need to verify the source of any large deposits in your bank account to ensure they're coming from an allowable source. That is, that you obtained the money legally and that it was not loaned to you.

Lenders may also look at the last two months of statements for your checking and savings accounts, money market accounts, or investment accounts to evaluate how much capital you have.

Collateral

Lenders consider the value of the property and other possessions that you're pledging as security against the loan.

In the case of a mortgage, the collateral is the home you're buying. If you don't pay your mortgage, the mortgage company could take possession of your home, known as foreclosure.

To determine the fair market value of the home you'd like to buy, during the homebuying process your lender will order an appraisal of the property that compares it to similar homes in the neighborhood.

Credit

Lenders check your credit score and history to assess your record of paying bills and other debts on time.

Many mortgages also have minimum credit score requirements. In addition, your credit score could dictate the interest rate you get on your loan and how much of a down payment will be required.

Even if you are a renter, or don't have plans to buy right now, it's a good idea to get smart about credit and know ways you can build and maintain strong credit health.

The 4 C's of Qualifying for a Mortgage (2024)

FAQs

The 4 C's of Qualifying for a Mortgage? ›

Credit, Capacity, Cash, and Collateral are the four Cs of home loans.

What are the 4 Cs in mortgage? ›

Meet the Fantastic Four - the 4 C's: Capacity, Credit, Collateral, and Capital. These titans hold the power to make or break your dream of homeownership. They're the guardians of mortgage approval, keeping a watchful eye on every aspect of your financial life.

What are the 4 Cs of loans? ›

It binds the information collected into 4 broad categories namely Character; Capacity; Capital and Conditions. These Cs have been extended to 5 by adding 'Collateral', or extended to 6 by adding 'Competition' to it (Reference: Credit Management and Debt Recovery by Bobby Rozario, Puru Grover).

What are the 4 Cs that lenders are looking at? ›

What Are the Four Cs of Credit?
  • Capacity.
  • Capital.
  • Collateral.
  • Character.

Which of the 4 Cs refers to your ability to earn enough verifiable income to make the mortgage payments and cover all other living expenses? ›

Lenders consider four criteria, also known as the 4 C's: Capacity, Capital, Credit, and Collateral. What is your ability to pay back your mortgage? Factors that play into your Capacity include current income, employment history, and liabilities, such as other loans and financial obligations.

What are the four Cs? ›

The 4 C's to 21st century skills are just what the title indicates. Students need these specific skills to fully participate in today's global community: Communication, Collaboration, Critical Thinking and Creativity.

What are the 4 Cs meaning? ›

The four C's of 21st Century skills are:

Critical thinking. Creativity. Collaboration. Communication.

What are the 5 Cs of borrowers? ›

Called the five Cs of credit, they include capacity, capital, conditions, character, and collateral. There is no regulatory standard that requires the use of the five Cs of credit, but the majority of lenders review most of this information prior to allowing a borrower to take on debt.

What income can be used to qualify for a mortgage? ›

In addition to your monthly income from wages earned, this can include social security income, rental property income, spousal support, or other non-taxable sources of income. Your work history: This helps lenders understand how stable your income is and how likely you are to repay your mortgage.

What is Cs loan? ›

Conditional Sale finance is a type of vehicle finance agreement where the lender buys the vehicle on your behalf. You then make fixed monthly payments for an agreed period. You'll be the registered keeper throughout the agreement but only become the full owner once you've made your final payment.

What are the 3 Cs in mortgage? ›

The Three C's

After the above documents (and possibly a few others) are gathered, an underwriter gets down to business. They evaluate credit and payment history, income and assets available for a down payment and categorize their findings as the Three C's: Capacity, Credit and Collateral.

What habit lowers your credit score? ›

Making late payments, even a single day late, can significantly affect your credit. This becomes especially true if you make a habit of paying late. Some lenders or credit card companies will charge you a fee for being a single day late and could cut you off from making further purchases on the account.

What are the 3 Cs for a loan? ›

Character, capital (or collateral), and capacity make up the three C's of credit. Credit history, sufficient finances for repayment, and collateral are all factors in establishing credit. A person's character is based on their ability to pay their bills on time, which includes their past payments.

How do you verify income for a mortgage? ›

Here are 13 forms of proof of income home buyers may need to provide during the home loan approval process.
  1. Paystubs. ...
  2. Proof of income letter. ...
  3. Last year's tax return. ...
  4. Social Security proof of income letter. ...
  5. Annuity statement. ...
  6. Pension distribution statement. ...
  7. Court-ordered agreements. ...
  8. 1099 statement for self-employed.
Feb 23, 2024

How do I prove cash income for a mortgage? ›

Next, we'll take a look at 10 ways to show proof of income if paid in cash.
  1. #1: Create a Paystub. ...
  2. #2: Keep an Updated Spreadsheet. ...
  3. #3: Bookkeeping Software. ...
  4. #4: Always Deposit the Payment and Print Bank Records. ...
  5. #5: Put it in Writing. ...
  6. #6: Create Your Own Receipts. ...
  7. #7: Utilize Your Tax Documents. ...
  8. #8: Use an App.
Jul 12, 2022

Which of the 4 Cs of creditworthiness indicates your ability to repay a loan? ›

Of the Four C's of Credit, capacity is often the most important. Capacity refers to a borrower's ability to pay back his/her loan. Obviously, your ability to pay back a loan is an important factor for a lender when considering you for a loan, but different lenders will measure this ability in different ways.

What are the 4 parts of a mortgage? ›

In fact, your monthly mortgage payment is made up of four main parts: the Principal, the Interest, the Taxes and the Insurance, altogether known as PITI.

What are the 5 Cs of underwriting? ›

The Underwriting Process of a Loan Application

One of the first things all lenders learn and use to make loan decisions are the “Five C's of Credit": Character, Conditions, Capital, Capacity, and Collateral. These are the criteria your prospective lender uses to determine whether to make you a loan (and on what terms).

What are the 5 Cs of lending? ›

The five C's, or characteristics, of credit — character, capacity, capital, conditions and collateral — are a framework used by many lenders to evaluate potential small-business borrowers.

What are the 5 Cs of the borrower? ›

The lender will typically follow what is called the Five Cs of Credit: Character, Capacity, Capital, Collateral and Conditions. Examining each of these things helps the lender determine the level of risk associated with providing the borrower with the requested funds.

References

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