What are the Four C’s of Borrowing?
The Four C’s of Borrowing are the most important definitions a borrower needs to know. These concepts determine an individual’s creditworthiness and, in turn, the kind of loan a potential borrower is qualified to take on. The strength of a borrower’s position and the willingness of any lending institution to lend are in direct relation to the borrower’s demonstration of the Four C’s.
- Capacity. Capacity is the borrower’s ability to repay the loan. In other words, capacity is your income. Capacity can be proven through employment, retirement, pension, or even disability income. Sometimes your loan underwriter will consider how long the anticipated income is going to last. The amount of the income determines the amount someone may borrow. Most loan programs provide for the verification of income.
- Collateral. Collateral is another way of saying “ownership.” Collateral is the money the borrower has invested in the real estate itself. Lenders take into account the value of the property as well as the assets being pledged as security by the borrower. For example, if a borrower wants to buy a house for $200,000 and they put down $40,000 for it, then they have a collateral position of 20%. The higher the collateral percentage is, the more likely the loan will be approved (provided the other two C’s are met, as well). It’s also important to note that some lenders charge Private Mortgage Insurance for loans in which the collateral is less than 20%.
- Capital. Lenders also take into consideration the capital you have or the money, savings, and investments you have readily available. Having reserves proves that you can manage your money and have funds, in addition to your income to pay your debt.
- Credit. A two-year credit history free of delinquencies, late payment, judgments, write-offs, and bankruptcies is ideal for the borrower. The most important payments in this equation is the borrower’s current housing payment. Have they been on time with their previous mortgage payments or rental payments? It’s vital that the borrower attain and maintain a credit score that is as high as possible.