When deciding whether to make a loan, lenders will look at following four elements: Capacity, Capital, Credit and Collateral. We usually call 4Cs .
Capacity to pay back the loan. Lenders evaluate your income, employment history, savings, and monthly debt payments, such as credit card charges and other financial obligations, to make sure that you have the means to take on a mortgage comfortably.
Lenders consider your readily available money and savings pattern plus investments, properties, and other assets that you could sell fairly quickly for cash. Having these reserves proves that you can manage your money and have funds, in addition to your income, to pay the mortgage.
Lenders check your credit score and history to assess your record of paying bills and other debts. Normally lenders will download your credit reports from three major credit bureaus – Experian, Transunion and Equifax – which contain detailed information about how much you have borrowed in the past and whether you have repaid on time. These reports also include last 7 years information if any on collection accounts, judgments, liens and bankruptcies. The Fair Issac Corporation uses the information to create a credit score, called FICO score, to help lenders get a quick snapshot of creditworthiness. See “ Factors that determine your credit score ”.
Collateral is the property that you’re pledging as security against the loan. If you default on the loan, lenders will repossess the property. Lenders take into account the location, value, characteristics, marketability of your property and your equity in the property.