The 6 C's of Underwriting

Is the credit history the only thing that matter ? Understanding What Lenders Look for in Borrowers

When applying for a mortgage, borrowers often wonder what lenders scrutinize before approving their loan. Understanding the criteria lenders assess can help applicants prepare and strengthen their applications. Here's a breakdown of what lenders consider when evaluating borrowers:

Character - The Borrower: Lenders assess the borrower's character by evaluating their ability and willingness to repay the loan. This involves analyzing their credit history, current debts, and repayment behavior.

Credit History: A clean credit history, indicating timely repayment of debts, reflects positively on the borrower's willingness to pay. Conversely, a history of late payments may raise concerns about their ability to fulfill future obligations. Lenders utilize credit bureaus like Equifax and TransUnion to verify information and identify trends in credit behavior, providing insights into the borrower's financial habits and capacity to repay.

Capacity: The borrower's capacity to repay is another crucial factor considered by lenders. This includes evaluating their current employment status, income stability, and living situation. Stable employment and income strengthen the borrower's ability to meet mortgage payments. However, risks associated with new or short employment tenure may require additional measures, such as adding a qualified guarantor or co-borrower. Lenders also assess the borrower's attitude towards shelter and their ability to manage financial responsibilities associated with homeownership.

Collateral: The property used as security for the mortgage loan is thoroughly evaluated by lenders. Factors such as the property's durability of value, location, and marketability play a significant role in determining its suitability as collateral. Lenders look for properties with stable values, minimal depreciation during economic downturns, and good marketability within a reasonable selling timeframe.

Capital - Down Payment: The borrower's capital investment, including the down payment, demonstrates their financial commitment and ability to save. Lenders consider various sources of down payment, such as cash, gifts, loans, or proceeds from the sale of an existing home. A substantial down payment signifies the borrower's financial stability and reduces the lender's risk exposure.

Common Sense: Lenders apply a dose of common sense throughout the evaluation process. They ensure data accuracy, consider mitigating factors, and review items that may seem inconsistent. Understanding the borrower's unique circumstances and adhering to lender guidelines help lenders make informed decisions and mitigate risks effectively.

In conclusion, understanding what lenders look for in borrowers can empower applicants to strengthen their mortgage applications and increase their chances of approval. By demonstrating good character, capacity, collateral, capital, and common sense, borrowers can position themselves favorably in the eyes of lenders and secure the financing they need for their homeownership goals.