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What do lenders look at when approving you?

June 15, 20232 min read

The "4 C's of Credit" is a standard framework lenders use to evaluate a borrower's creditworthiness. These are not the only factors when approving a mortgage, but it is the start of how mortgage lenders evaluate a client. These factors help lenders assess the risk associated with extending credit to an individual. The four C's of credit are as follows:

  1. Character: Character refers to the borrower's reputation and willingness to repay debts. Lenders assess a borrower's character by considering their credit history, including their track record of making timely payments, existing debt obligations, and any instances of bankruptcy or default. A good credit history demonstrates responsible financial behavior and increases the borrower's character assessment.

  2. Capacity: Capacity measures the borrower's ability to repay the loan. Lenders evaluate a borrower's capacity by analyzing their income, employment stability, and the debt-to-income ratio of the client. They want to ensure that the borrower has a sufficient and steady income stream to make regular loan payments without financial strain.

  3. Capital: Capital refers to the borrower's financial reserves or assets. Lenders consider the borrower's capital to determine if they have enough assets or savings that can be used as collateral or as a backup source for loan repayment. Higher levels of assets reassure lenders, as it reduces the risk associated with lending.

  4. Collateral: Collateral represents any assets or property that can be pledged as security for the loan. This is typically the home you purchase or refinance regarding a mortgage application. Lenders evaluate the quality and value of the collateral to assess the risk involved in case they need to seize and sell the assets to recover their funds.

By evaluating these four factors, lenders can make informed decisions about granting credit, setting loan terms, and determining interest rates. Each C plays a crucial role in assessing a borrower's creditworthiness and managing the lender's risk.

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Ashley Courville

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