In our previous post, we briefly covered the most common question potential first-time homebuyers have: “How much do I need to buy a house?” in which we covered the three important parts of the first payment made to the lender: earnest money, downpayment, and closing costs. But as we explained, there are just many other factors that you need to consider when thinking about buying the house of your dreams. The 4 C’s stand for Capital, Collateral, Credit, and Capacity to pay back the loan, and it’s what lenders use to analyze if you’re financially able to take on the responsibility of purchasing a home.
Capital: This reviews the amount of money that you have available to make the down payment and closing costs. This part also explores other financial means such as investments and savings to show the lender that you are responsible for your finances.
Credit: Another super important C, not only in the homebuying process but for any financial process, is Credit. This is a report of your paying history of credit card bills, consumer loans, student loans, etc. Lenders request this report from you to see how you’ve managed your debts in the past, if you pay your bills on time, have a healthy balance between your debts and income, etc.
Capacity: This proves that you earn enough money to cover all of your monthly expenses and your future mortgage payments. Lenders verify this with proof of income, tax transcripts, and other documents that can certify that you have enough income to cover your debts, including the mortgage.
Collateral: Lenders estimate how much the home is worth to justify the amount of money being borrowed. This is done through the appraisal process, which studies the condition of the house, location, size, and other factors that determine the approximate price of the house in the market.
It is super important that you analyze the 4 C’s on your own before you go up to a lender. Now that you have an understanding of what they are, you can begin reviewing them to verify where your 4 C’s are and get working on them if necessary.