The Credit Score Banks Look for When Approving a Home Mortgage Loan
If you’re nervously waiting to see if that mortgage loan you have applied for will be approved, here is what the bank is basically looking at — Your 4 C’s.
Character — How well you pay your debts and more specifically, your credit score. Most lenders work on a tiered basis of credit scores. The lower the score, the higher the risk. The tiers that lenders use vary from institution to institution but on average industry standards, the tiers are 740+ for “A+” credit, 700-739 for “A” credit, 670-699 for “B” credit, 640-669 for “C” credit and 620-639 for “D” credit and anything lower is listed as “E” and that is considered sub-prime credit.
Capacity — How much of a payment can you afford. The industry standards for “Housing Debt-to-Income Ratios” are a max of 28 percent for home mortgage or monthly rent. A “Total Debt-to-Income Ratio” (home mortgage or rent, plus all other installment debt like car payments, credit card payments) should not exceed 36 percent.
Collateral — What you are putting up for security on the loan. If you are buying a car, you are putting the car up for collateral. If you are buying a house, you are putting the house up for security. In terms of down payments, it depends on what you are buying and your credit score. For a home, it is a standard 80/20 (finance 80 percent with 20 percent down), or even as low as 3.5 percent down with a FHA loan. People with good credit can get 100 percent financing for autos without a lot of difficulty but a lower credit score may require you to put some money down.
Capital — How much money you have in reserve to back up the loan should there be an interruption of income and/or money you may need for a down payment and closing costs, etc.
Tags: Capacity, Capital, Car Payments, Character, Closing Costs, Collateral, Credit Card Payments, Credit Score, Down Payment, FHA Loan, Financing, Home Mortgage Loan, Housing Debt-to-Income Ratios, Mortgage Loan, Sub-Prime Credit, Total Debt-to-Income Ratio, Your 4 Cees