When we hear the "credit" words such as; credit scores, timely or late payments, and ratings are typically what come to mind. But from a lender’s point of view, credit is spelled with 4 “c”s and account for so much more than just scores, ratings or balances.

The 4 “C”s are; Credit History, Capacity to Repay; Cash assets available to close the transaction; and Collateral. Let’s get more specific.

Credit history:

• Yes, this is where the credit scores are important. Most lenders require a 640 mid credit score in order to move forward with a financing transaction. There are, however, some 1^st time buyer programs still available that do allow mid scores to be as low as 620. When I say mid score, that means that when credit is pulled and all three bureaus report their scores for the customer… It is the Middle score that counts. So a high score from one bureau of say 656 and then two scores under 640 would not work since it is the middle score that is used.
• Credit history shows a lender the customer’s payment history which is documentation of a customer’s willingness to pay on time. –Important in all lending, but crucial in the case of mortgage lending. From time to time, I have had a customer say to me that they didn’t feel “guilty” making a late payment since they always paid the “late fee”.
• o In mortgage lending this approach to late payments is significant. You see, homeowners make payments mostly to servicing companies (could be a big bank). This is because most loans are sold to Fannie Mae or Freddie Mac or in the case of most government loans (FHA, VA) to Genny Mae. These then are the true investor and the company (or bank) collecting the payments is the servicing agent.
• o Every month the Servicer collects the payment and forwards the interest to the Investor, does the bookkeeping on the principle pay down and if an escrow account is included those calculations are done as well. For this service the servicing company is pay a small fee. (Lots of small fees add up to make this big and profitable business.) However, if the loan payment is received late… or not at all, the servicing company is still required to pay the investor their interest… and collect from you as the customer. 
•  This gets costly. A whole department is staffed just for late payers. The servicing company borrows on their credit line to advance investor funds… 
•  So, the late fees collected from the negligent customer really is there to offset an actual expense and not to make money.
•  No Lender wants to make a loan to someone that either cannot or doesn’t care enough to make their payments on time.

Capacity to Repay:

• When lenders look at capacity to repay it goes beyond the approvable ratio’s.
• o Are there employment gaps if so why?
• o Job stability, or if changes are they upward?
• o Is there additional income? If so from where? Is it stable? Can it be counted upon?
• o Is the income consistent?

Cash Assets to Close the Transaction:

• So then the next “C” in credit underwriting is the analysis of the cash involved in the transaction.
•  Where did it come from- was it borrowed (That could jeopardize the customers’ ability to repay the home loan.)
• o If borrowed what is the payment
• o If gift then that needs to be sourced and documented as well.

Collateral:

• Collateral means the security for the loan… the property.
• Condition?
• Value?
•  Market, declining?
•  Loan to value??

In making a lending decision all these factors go into the approval process. One of the best ways to think of the loan process is that your Loan Originator works with you not only to provide the information necessary to choose a loan but also to bring together all the information necessary for the underwriter and ultimately the Investor to have a complete picture of your transaction.

That process is very much like putting together a jigsaw puzzle. All the pieces need to be in place for a complete picture. If and when you are in a loan application situation, help yourself and your Loan Consultant by providing all the requested information as soon as possible. Your reward? Loan approval quicker and with fewer “last minute” conditions.

As always, questions and comments are welcome.