THE 3 Cs OF BORROWER
Every Lender Evaluates Risk Using
A borrower’s ability to acquire a home loan depends upon the
perceived risk of a lender who grants the loan request. When measuring the risk
factor, lenders first review the 3 Cs of lending – Credit, Capacity and
The CREDIT component relies upon a review of credit history
and credit scores to determine what lenders refer to as the CHARACTER of the
intended borrower. A credit report provides a glimpse into a borrower’s credit
use and/or abuse and evaluates credit worthiness via a FICO credit score.
A higher credit score usually results in more attractive
terms and a lower interest rate. Maintaining a high credit score requires attention
and an understanding of what affects the calculation of your credit score. This tip sheet section of our web page
includes two excellent articles explaining credit scoring – one is
Understanding Your History and another entitled Credit Scoring & Credit
The second criteria is CAPACITY
which refers to a borrower’s ability to repay a loan. Lenders examine the
length and stability of both employment and income plus the ability of the
borrower to cover down payment, closing costs and, if required, reserves.
Self-employed borrowers should not be intimidated by the extra information
generally required. Your loan officer will guide everyone through this part of
COLLATERAL is the third leg of this qualifying stool, so to
speak. This is the value of the property being purchased and which is being
pledged as security for the loan. A Loan-to-Value is calculated which is the
amount of the loan in relationship to the value of the property. For instance,
borrowing $80,000 for a $100,000 home purchase represents an 80% Loan-to-Value
A higher down payment amount is viewed as a less risky loan
– for example, a 20% down payment is less risky than a loan wherein the
borrower is providing only a 5% down payment. And then there is the CONDITION
of the property.
While a property might have what are called cosmetic flaws,
lenders want their security/collateral to be in good condition. If a home has
any extensive amount of repairs to be done, they will most likely have to be
completed prior to close of escrow.
There are loans that accommodate repairs included in the
purchase loan but these loans are very specific and come with their own set of
rules and also plenty of frustration getting through what can be a considerable number of hoops in the qualifying process.
These are certainly not regular home purchase loans.
The above evaluation criteria are applied to all borrowers.
It may sound more difficult than it is, especially if you have the professional
guidance or a mortgage lender.