The 5 C's of Credit

Jun 27
Category | General

Borrowers know that once they apply for a loan (practically any loan), the lender will underwrite the loan. The underwriting time it takes to review the loan, looking at the borrower’s income, credit report, appraisal of the property, and so on, varies by type of loan and lender. But borrowers should know that approval is never a sure thing, even if they have millions in the bank, or a flawless 850 FICO credit score.

We mention this because the Federal Financial Institutions Examination Council (FFIEC) released Home Mortgage Disclosure Act (HMDA) data. The report shows loan approvals AND declinations: hundreds of thousands of loans needed to purchase homes were rejected. Yes, some of these borrowers went to another lender, but it is a useful exercise for potential borrowers to know why previous borrowers were turned down. And yes, the 5 C’s of credit matter: character, capacity, conditions, capital, and collateral.

The broad categories for turn downs include credit history, affordability and income, assets and down payment, and property issues. The list of reason start with the top five: loan amount too big, income too low, inability to document income, using rental income to qualify, and the DTI ratio being exceeded.

Moving down the list, the FFIEC’s HMDA data shows mortgage rates rise and push payments too high, payment shock, LTV (loan to value) too high, inability to obtain secondary financing, and underwater on mortgage. (Remember that there are programs for such individuals.) Next is not enough assets, unable to verify assets, no job or job history too limited, changed jobs recently, self-employment issues, using business funds to qualify, limited credit history, credit score too low or the spouse’s credit score too low, and so on.

It is not difficult to see that the reasons all return to the 5 C’s of credit, and these need to be kept in mind when applying for a loan, and for dealing with underwriting conditions.


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