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25
The 5C's of Credit When You're Buying a Home
Our real estate agents are here to support your home buying goals every step of the way.
That includes providing expert insight on the parts of the home buying process people find confusing. Many customers report their biggest questions have to do with securing a home loan.
No matter what kind of mortgage you pursue, odds are credit will be a factor. Good credit can help you get better loan terms. Only a few programs, most catering to first-time homebuyers, do not consider credit.
Your credit score is a numerical representation of the level of risk lenders take on when they offer you a loan package. It is determined by your history of paying debts on time, as well as the type and number of financial obligations you have.
While credit score is one of the leading factors in a loan decision, it's not the only one.
There are five major factors – the five Cs of credit – lenders often consider. In most cases, lending agents make decisions with all these factors in mind. Knowing them makes it easier to find the right mortgage for you.
They include:
1. Character
It may seem strange to say, but lenders measure your character by your credit. This is where your credit score comes into the picture most directly: Your credit report is used as a snapshot of how often you make your payments on time and how many credit accounts you have.
Steps you can take:
- Get your free annual credit report and dispute any errors you find.
- Ask your lender about how they characterize and use credit scores.
- Pay bills on time and avoid significant purchases while buying a home.
2. Capacity
Capacity refers to your ability to pay back the obligations you take on. It is measured according to financial stability, including steady employment and level of income. In some cases, lenders may also consider how long you've been employed with a particular company.
Steps you can take:
- Prepare to verify your income with two recent tax returns and six months of pay stubs.
- Pay off small credit debts (but don't close associated accounts) before you house-hunt.
- Contact your HR department, so you have records of how long you've been employed.
3. Capital
Capital is the sum of your assets after you buy your home. That includes things like savings as well as property you own outright, like cars and art. If you have investments such as stock or even a well-funded retirement plan, these can also be considered capital.
Steps you can take:
- Save up as much as you can for a down payment before house-hunting.
- Find out what size cash reserve each mortgage lender expects from you.
4. Collateral
Collateral is something of value used to secure a loan. In most cases, the collateral for a home loan is the home itself. However, lenders often want to verify the market value of the home first.
Steps you can take:
- Perform a home assessment early on to verify a home's value before you commit fully.
5. Conditions
Conditions refer to the market conditions that influence what homes are available, their value, and funding options that are easy or difficult to obtain. While you can't influence conditions directly, you can take action at the most favorable time to reach your goals.
Steps you can take:
- Find an experienced real estate agent who can provide accurate, helpful advice.
- Go through mortgage pre-approval to make it easier and faster to bid on a home.
To find out more or get started, contact us at Laffey Real Estate today.
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