The 5 C’s of Credit

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  • Lenders want to know that you're going to pay them back if they loan you a bunch of money. The way they decide how good of a risk you are is with the 5 "C's.”

    The 5 C’s of Credit & What They Mean for You

    Capacity.  What is your capacity, or ability, to repay the loan? They will verify how much income you make, how you make it, and whether your employment history is consistent.

    Capital.  Capital means money, and the more you have the more they’ll lend you (strange, right?). The lender looks at how much money you’ll put as a down payment, but also how much you’ll have left in the bank just in case you have financial trouble down the road.

    Large, unexplained deposits into your bank account (from relatives, credit cards, etc.) will be discovered and may not be allowed.

    Character.  No, not “are you a character?”. . . do you have good character? What’s your credit score? Do you pay your rent, debts, child support, and other financial obligations on time?

    Collateral.  Collateral is the property you are buying. Does it appraise for what you are paying? Is the roof caving in or are there obvious, sizable defects in the house?  We discuss appraisals in All About Home Appraisals.

    Just because you fall short in one of the “C”s doesn’t mean you won’t get a loan.  If you’re strong in one area, it may compensate for weakness in another area.

    Conditions.  They look at what the local housing market is like. If they had to foreclose on you, could they easily sell the home?

    Obviously, you can’t control all these factors. So, the best thing to do is sit down with a lender, explain where you’re at financially, and together, come up with a plan to move you toward qualifying for a loan.

    Be sure to check out our lesson Credit Improvement Tips to get your credit score as high as possible.

    Thinking of buying a home in the Portland, Oregon area? Checkout our First Time Home Buying Classes!

    The 5 C’s of Credit was last modified: April 30th, 2018 by David Axness

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