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February 4th, 2019 by

Buying a House 5Cs of Credit
Deciding you're ready to buy your first home is both exhilarating and intimidating. It takes time and effort to scrimp and save up enough for a down payment, then comes the exciting search for your dream home. Once our real estate agents help you find the perfect property, you'll have to get down to the nitty gritty – qualifying for a loan. 

Before a lender is willing to approve your loan application, you must prove that they can depend on you to pay back what you borrow. The "5 C's" of credit are the factors used to determine your creditworthiness. Let's take a look at each one in detail.

  1. Character
    Character is the lender's determination of your general trustworthiness. Since it's not likely that the lender knows you personally, this is generally determined by reviewing your credit report and credit score. They'll look for red flags like a history of failing to make payments on time, loan defaults, or a general lack of credit history.

    The higher your credit score, the more likely you are to receive approval and a favorable rate. You can prepare for this review by checking your credit reports before applying for your loan. This will give you time to correct any errors or take steps to improve your score if needed.

  2. Capacity
    In simple terms, capacity refers to your ability to pay back the loan. Factors that are considered include how much income you earn, where the income comes from, and your employment stability.

    Lenders might also evaluate your debt-to-income (DCI) ratio to ensure that you're not taking on more payments than you can reasonably handle. To put yourself in the best light, work on paying down outstanding debts and building up a healthy savings account.

  3. Capital
    Capital is the amount of cash cushion you'll have left over after you purchase your home. Lenders want to make sure you're not spending every last penny on this purchase, which could leave you vulnerable in an emergency.

    You'll need to show that you have sufficient extra cash or other investments that could be liquidated quickly if needed. If you're concerned about how much cushion you'll need, consider consulting with a mortgage broker ahead of time so you can set realistic savings goals.

  4. Collateral
    When you're taking out a mortgage, you secure the loan by offering up the home you're buying as collateral. This means that if you fail to repay your loan, the lender can take back the home and sell it.

    To protect themselves, they'll need to evaluate the home to confirm it's worth enough to cover what you owe. This process typically involves a mandatory appraisal and might also include an inspection to ensure that there's nothing critically wrong with the home.

  5. Conditions
    The term "conditions" refers to the general state of affairs at the time you apply for the loan. This includes interest rates, mortgage rates, cost of living, and the sale price of other homes in the area.

    You can limit the impact of conditions on your ability to buy a house by going through the pre-qualification process before you start your search. You may also consider shopping around and comparing several lenders to confirm you get the best deal available at the time you're applying.

The most important thing for first-time homebuyers to remember is that you don't have to do it alone. From finding a home you love to connecting with the right financial professionals, a great REALTOR® will guide you through every step of the process. Contact us at Cressy & Everett Real Estate to discuss your goals and learn how we can help.

Categories: Buying a Home

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