Credit – Why So Important?
When a Mortgage Company looks at your loan request, they are looking at three characteristics known as the Three C’s of Credit. These characteristics are character, capacity and collateral.
Let’s look at character. A creditor will look at your credit history and paying habits to determine your character. They obtain this information from a credit-reporting agency such as TransUnion, Equifax or Experian. It is not unusual for a lender to look at credit reports from all three credit reporting agencies.
All three Credit agencies use credit scores that reflect a three digit number based on your borrowing habits: how well you pay your creditors and how often you apply or open credit. If your credit score is high the creditor considers you to be of better character or risk than someone with a low score.
let’s look at collateral. The lender wants to see what you have for collateral. A borrower with more collateral (equity) has a better chance of getting a loan than someone with less collateral. Secondly, if you have more assets, pledged or not, the lender will look more favorably at your loan request. When completing a loan request, you should list all assets.
Your ability to repay a loan is considered your capacity. Lenders calculate a debt ratios (front and back) to see how likely you are to repay the loan.
Your Front ratio is your total housing expense which includes Principle and Interest, Taxes, and Mortgage Insurance devided by your gross monthly income. If your monthly gross income is $4000 and your Housing expense is $1102; your front ratio is 27.55%.
The Back ratio is your housing expense (PITI) plus all other revolving and Installment account payments divided by your gross monthly income. People with lower debt ratios have a better chance of being approved and in most cases receive a better interest rate.
All three of these factors play an important part in granting credit. People with higher credit scores, more assets, and lower debt ratios are more likely to be approved and will receive the best interest rates.
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