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When you’re looking for a new mortgage or a home equity
line of credit, many lenders evaluate your worthiness based
on the "Three C's."
Credit
The primary factor when considering a loan. Your credit is
a personal history as a loan candidate and lenders look at
your past as a gauge to your future reliability. Is it likely
that you will repay the loan? Are your payments on time and
up-to-date? Are you financially stable and reliable?
Capacity
Your ability to repay the loan is a major factor in determining
your loan eligibility. Are you able to pay the loan? What
kind of outstanding debt do you have? Do you have enough earning
power and net worth to repay a mortgage or home equity line
of credit?
Collateral
Do you own something of value that can be promised to the
lender if you don't repay the loan? There are a few more factors
mortgage lenders look into when evaluating your capability
of obtaining a loan. To confirm your responsibility and stability
they may examine:
- Your monthly income
- Occupation and length of time with employer (two or more
years is ideal)
- Homeownership status and history
- How often you move or have moved; patterns of behavior
and the timing of that behavior
And there are other examples, such as, if you had a charge-off
(when the creditor sells your debt to a collection agency)
in your credit file from several years ago and you've been
able to maintain your credit over the years, you will be judged
differently from someone who recently had a charge-off.
Creditors look at sever other factors when determining if
you are loan eligible. These include if you have had any charge-offs
(debts sent to a collection agency) how long ago these occurred
and your credit history following the charge-off.
If you are even thinking about owning your own home, it is
imperative that you begin by showing responsibility with your
credit and show potential lenders that you are worthy of their
confidence to repay your loan. This not only means making
payments, but making them on time and regularly.
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Essentially, credit bureaus will look for five main characteristics
when determining how high your credit score will be.
In descending order, they are:
- Past delinquency. If you have failed to make payments
in the past, lenders fear you will repeat that behavior.
- How your credit has been used. Have you maxed out or spent
close to the limit on a credit card? If so, then you may
be considered a greater risk than someone who is more conservative
with his or her credit line. Do you pay off your bill every
month or a keep a revolving balance?
- Your age. The scoring models can judge each individual
separately. Thus a 20-year-old's credit history would not
be compared to a 45-year-old's credit history.
- Frequency of credit inquiries. It is recommended that
you check your credit once a year. Creditors' requesting
reports several times in a short period may send a signal
that you are applying for a lot of credit due to financial
difficulties, or that you are taking on too much debt and
overextending yourself.
- Your credit variety. It is best to have a mix of installment
and revolving loans (e.g., auto, credit cards, retail, etc.).
On installment loans, a person borrows money once and makes
fixed payments until the balance is gone, while revolving
borrowers make regular payments, each of which frees up
more money to access.
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