There are four core components (the Four C’s) that a lender will evaluate in determining whether you are eligible for a loan: Capacity, Capital, Collateral & Credit
We understand that qualifying for a mortgage can be intimidating. We are here to help make navigating the mortgage application process easier by giving you tips on what lenders typically look at when considering the approval of a loan.
Capacity – your ability to pay back the loan
Lenders will 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. They will also review years of federal income tax returns, and verify proof of income. They will evaluate your income based on:
- The source of income (e.g., salaried, commission or self-employed)
- How long you have been receiving the income and whether it has 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 you are obligated to pay
Capital – cash and other assets you currently have
Lenders consider your readily available money and savings plus investments, properties and other assets that you could access 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:
- Savings
- Money market funds
- Other investments that can be converted to cash, such as Individual Retirement Accounts (IRAs), Certificates of Deposit (CDs), stocks, bonds or 401(k) accounts
Along with cash reserves, other acceptable sources of capital might include:
- Gifts from family members
- Down payment or closing cost assistance programs
- Grants
If cash reserves derive from large deposits, lenders may verify that funds are coming from a reliable source. Some lenders may also look at bank statements from your checking and savings accounts, money market accounts, or investment accounts to evaluate how much capital you have.
Collateral – something of value pledged as security against the value of your loan
Lenders consider the value of the property and other possessions that you are pledging as security against the loan.
In the case of a mortgage, the collateral is usually home you are buying. If you don’t pay your mortgage, the lender 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 home buying process your lender will order an appraisal of the property that compares it to similar homes in the neighborhood.
Credit – your history of paying bills on time
When applying for a mortgage, some lenders will review your credit history to assess your payment records and view your credit score . They want to understand and analyze your overall history as a borrower and see how well you manage your other debts and monthly payments.
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.
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