Going blindly into house buying can be overwhelming, but there’s one rule you’ll hear from every realtor, agent, and house buying pro: get prequalified for a loan before you look at houses. Not only will getting prequalified keep you from having a home pulled out from under you because you have to wait for a lender, but it will also give you a clear vision of what you can afford.
There are four Cs that every lender looks for in a possible lender. Capacity, collateral, capital, and credit create the perfect borrower! Here’s why each of them matters.
Capacity
This part of the process is going to feel very personal, and that’s because it is! Lenders will look at your capacity to handle the loan. This means checking your credit score and history, looking at your work history, and ensuring that you have enough income to afford a home.
If you have monthly payments like debt, child support, or other expenses that come out of your account every month, the lender will look at these and take them seriously. This will give them the chance to decide if you’re a safe bet to put their money into.
Collateral
Although this doesn’t affect every loan, it’s still important to consider. The collateral is how much is being put up to guarantee you’ll follow through on your word. This means the property and whatever other physical items you will put up against the loan if you cannot pay for it. They’ll be looking at everything through the gaze of a seller closing costs calculator, ensuring that they can make their money back if need be.
This puts pressure on you to ensure that you pay your loan back on time every time, which means they don’t have to put their faith only in your word.
Capital
How much money do you have in other options? Do you invest your money in the stock market, or do you own other properties? At this C, your lenders will consider what items you can quickly sell so that you can make money necessary to pay your house payment if your income gets disrupted. If there’s anything 2020 taught us, it’s that we can’t assume we know where our financial situation will be in a couple of years. It’s advised that you have savings, but also have some investment you can withdraw from quickly is also a necessity.
Credit
What’s your credit score and history look like? Debt isn’t the end of the world! However, if you owe student debt and have been paying it off every month on time, your credit score is going to be better than someone who’s never opened any line of credit.
This is when lenders will look at your score itself, hoping for anything above 625, and consider what it says about you. From there, they look at how long any open accounts have existed, what your payments have looked like, and how much they trust you based on this information.