Getting A Mortgage: The Four C's of Credit (2023)


For first-time home buyers, the mortgage process can be daunting. It is often confusing what mortgage lenders are looking for and how they determine your approval limits. So today, I am happy to have Cindi Conley, a 30-year veteran of the industry, here to break it down for you. She’s going to share the four key components of the mortgage process to help you navigate the home buying process like a pro. Take it away, Cindi!

Applying for a mortgage is a complex and mysterious process for both first-time home buyers and repeat borrowers. And to a lender, a loan applicant is someone they don’t know, asking for a lot of money to purchase a property the lender’s never seen. They decide if they’re ok via a method they’ve been using for decades. Yes, it involves mathematical equations, but don’t focus on the math. Focus on the technique behind the Four C’s of Credit.

The Four C’s are a framework underwriters (the person making the lending decision) use to build a story about you from all the documents you provide when you apply. While everyone’s finances are unique, the Four C’s are applied in the same way to every file. Underwriters use the Four C’s to decide if you can afford the mortgage today and predict (or guess) if you’ll be able to afford it for as long as you have the mortgage.

Table of Contents

The Four C’s

Start with a general overview of the Four C’s:

  • Capacity: This tells the story about your ability (capacity) to make the mortgage payment. Income documents are collected to see how you earn money, how long you’ve earned it in this way, and where you earn it. It also includes details about your debt – how much you have, if it’s increased or decreased, and the monthly cost.
  • Credit: The underwriter reviews your credit report which includes details about credit cards (open and closed), installment loans and mortgages. It also has balance and payment histories, current balances, minimum monthly payments and the actual payment amount you make.
  • Capital: This is all about your cash. Underwriters will look at where all your money came from – earnings, savings, or gift? They will also confirm that you have enough for the down payment, closing costs, and your first mortgage payment.
  • Collateral: The review of the value and condition of the property. An independent appraiser assesses the property and its condition, including information on the neighborhood in the report.

Capacity – Can You Make the Payments?

Since an underwriter can’t sit down and interview you personally, each of the Four C’s relies on documentation to communicate your story. The documents are your ‘voice.’ To understand this concept, let’s take a deep dive into each one, beginning with Capacity.

(Video) The 4 C’s of Qualifying for a Mortgage

For underwriters to determine if you can repay a mortgage, it’s not as simple as documenting your income and monthly payments. They consider what you do for a living and how long you’ve been doing it by gathering income documents for the past two years.

If you’re employed, the last two years W-2 forms will be required, and the current full month of pay stubs. Everything that happened within the last two years – job changes, change of industry, or unemployment – can be found in the documents you provide. Pay stubs contain current earnings, year-to-date earnings, how often you’re paid, and bonus or commissions income if you earn them.

If you do earn a commission or bonus, referred to as variable income, the underwriter will take what the bonus/commissions you’ve received over the two years and divide by 24 months to calculate the average.

Be prepared to explain any gaps or changes with a brief letter, and supporting documentation. Your “story” is told via your documents in your loan file which is passed on to others for review both during and after the loan process.

Proving Capacity When Self-Employed

If you’re self-employed, you’ll provide the last two years’ tax returns (personal and business), a Profit and Loss statement, and a Balance sheet for the current year. Depending on the legal structure of your business there may be other documents you’ll need to provide so the underwriter can calculate your qualifying income.

Credit – What You’ve Borrowed

While Capacity includes a review of your debt, it blends into the next C: Credit. The central document in this C is your credit report which is used to evaluate if you’re creditworthy. The report documents many details besides your credit, including date of birth, social security number, public records, and, of course, your credit scores.

The three credit bureaus (Equifax, Experian, and TransUnion) have added more details to credit reports over the last few years. They now include spending and payment history for several years, which gives the underwriter a full picture of how you use credit. For example, you may have a credit card that had a high balance for a few months but has a zero balance now. The underwriter will see this and want to know the source of the money used to pay off the balance and will ask for any documentation that gives the details.

Underwriters will also use your credit report to calculate the debt-to-income (DTI) ratio or the percentage of your monthly income needed to pay your debt. They take the minimum monthly payments from the report, add them to the proposed mortgage payment and divide the total by your monthly income. The maximum allowed is between 43-45% of your income (before taxes), depending on the size of the mortgage.

Considering Credit Scores

Yes, they do look at your credit scores.Credit scoring started when Fair Isaac developed a computer model to predict the likelihood of a consumer being 90 days late on a credit obligation sometime in the future. Soon after, all three credit bureaus (Equifax, TransUnion, and Experian) developed similar scoring models, and ‘credit scores’ became a permanent part of mortgage underwriting.

A credit review doesn’t stop with your score and DTI percentage. Underwriters look for late payments and whether you make minimum payments monthly or pay large chunks. They look for large spikes in credit card balances, maxed out credit cards, or whether you use credit at all. Why are these important?

(Video) What Are the “4 C’s” of Credit?

Well, if you carry high balances and make minimum payments, that tells the underwriter you’re at your maximum debt payment capacity based on your income. Or if you don’t use credit much, or at all, there’s no way for the underwriter to predict if you’ll pay back a large debt like a mortgage.

Capital – Your Money

The next C, Capital, is one of the most critical as underwriters confirm that you have the cash you’ll need for the down payment and closing costs, referred to as ‘cash to close.’ You’ll need to provide two months of complete statements for any asset accounts containing your cash-to-close including checking, savings, retirement, and investment accounts.

The underwriter uses your statements to confirm where your money is held and how long you’ve been accumulating (saving) it. The ability to save is an essential part of the underwriting decision. Borrowers who aren’t living paycheck to paycheck but are prepared for an unexpected financial issue are a good credit risk for lenders. Note that a history of repaying student loans is proof of your ‘ability to save’.

You may receive requests for additional documentation regarding your assets because underwriters must comply with the Anti-Money Laundering and Patriot Acts. In general, this means the source of incoming funds to your accounts must be identified, either directly on your statements or by separate documents. If you have large deposits or large payments listed on your statements, you’ll be asked for a written explanation and any documents to support it.

Collateral – The Value of Your Future Home

The final C, Collateral, is all about the property and what it’s worth. Lenders need an independent assessment of the property in case you stop making the payments one day and they have to sell the property to pay off the loan. So, before deciding to make the loan, they appraise the property to make sure it’s worth enough to cover the mortgage in that worse case scenario.

The appraisal details the specific characteristics of a property and compares it to sales of similar properties nearby. The appraised value is based on comparable recent sales and the condition of those properties when they sold. The appraised value is adjusted based on your potential property’s condition compared to other recent sales. For example, if a neighboring property underwent a luxury renovation before its sale, the value of your property will be adjusted down in comparison.

It’s important to note that an appraisal is for the benefit of the lender, as described above, and not to confirm that you’re paying a reasonable price. Also, if the appraiser sees visible signs of disrepair that could present a ‘health and safety’ issue, they’ll note this on the report. These can include issues with plumbing, electrical, or heating systems and they must be repaired before the loan can close.

Taking Control of the 4 C’s

While there is a basic checklist of documents every borrower must provide when applying for a mortgage, that may not give the underwriter your complete story. Now that you know what each of the Four C’s focuses on uncovering, you can apply it to your unique financial situation. When the underwriter asks you for more details, in writing, remember that they’re just trying to learn your story – and document it in the loan file.

Getting A Mortgage: The Four C's of Credit (1)

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(Video) Exploring the Four Cs of Credit
(Video) Rob The Mortgage Man 4 C's Of Credit

Cindi Conley is a freelance business writer specializing in personal finance. A mortgage and real estate subject matter expert after a 30+ year career in Mortgage Banking, she ghostwrites for mortgage companies, financial service businesses, and real estate agents – all while living life in Northern California. You can find her at, or on Twitter @Cindithewriter.

Getting A Mortgage: The Four C's of Credit (2)


(Video) The 4 C's of Obtaining Credit


What are the 4 Cs of mortgage loan application consideration What does each one stand for and mean to a homeowner? ›

Capital. Credit History. Capacity. Collateral: The infamous 4 C's of credit. Lender's review each of these concepts when determining whether or not you are a good candidate to lend a mortgage to.

What are the 4 Cs of credit explain and define? ›

The 4 Cs of Credit helps in making the evaluation of credit risk systematic. They provide a framework within which the information could be gathered, segregated and analyzed. It binds the information collected into 4 broad categories namely Character; Capacity; Capital and Conditions.

What does capacity one of the 4 Cs of credit tell about you? ›

Capacity measures the borrower's ability to repay a loan by comparing income against recurring debts and assessing the borrower's debt-to-income (DTI) ratio. Lenders calculate DTI by adding a borrower's total monthly debt payments and dividing that by the borrower's gross monthly income.

What is the capacity of the 4 Cs of credit? ›

Concept 86: Four Cs (Capacity, Collateral, Covenants, and Character) of Traditional Credit Analysis. The components of traditional credit analysis are known as the 4 Cs: Capacity: The ability of the borrower to make interest and principal payments on time.

What are the three Cs that underwriters use to evaluate loan applications? ›

Character, Capacity and Capital.

What are the 4 things for mortgage? ›

A mortgage payment is typically made up of four components: principal, interest, taxes and insurance. The Principal portion is the amount that pays down your outstanding loan amount. Interest is the cost of borrowing money. The amount of interest you pay is determined by your interest rate and your loan balance.

What are the four 4 basic elements of credit? ›

The four elements of a firm's credit policy are credit period, discounts, credit standards, and collection policy.

What are the 4 main types of credit? ›

Credit cards, buying a car or home, heat, water, phone and other utilities, furniture loans, student loans, and overdraft accounts are examples of credit. In general, credit can be grouped into four broad categories: service, installment, revolving, and open credit (NYC Department of Consumer Affairs, 2013).

What are the 4 parts of credit? ›

These four categories are: identifying information, credit accounts, credit inquiries and public records.

Is capacity the most important C of the credit decision? ›

When you apply for a business loan, consider the 5 Cs that lenders look for: Capacity, Capital, Collateral, Conditions and Character. The most important is capacity, which is your ability to repay the loan.

What do you think is the most important C among the 4cs of credit? ›

Capacity. Of the Four C's of Credit, capacity is often the most important. Capacity refers to a borrower's ability to pay back his/her loan. Obviously, your ability to pay back a loan is an important factor for a lender when considering you for a loan, but different lenders will measure this ability in different ways.

What does collateral one of the 4 Cs of credit tell you about your loan application? ›

Collateral to Secure the Loan

Collateral is the cash and assets a business owner pledges to secure a loan. In addition to having good credit, a proven ability to make money, and business assets, banks will often require an owner to pledge their own personal assets as security for the loan.

What are the four Cs that are used to evaluate a loan application? ›

Standards may differ from lender to lender, but there are four core components — the four C's — that lender will evaluate in determining whether they will make a loan: capacity, capital, collateral and credit.

How much credit card capacity should I have? ›

Experts generally recommend maintaining a credit utilization rate below 30%, with some suggesting that you should aim for a single-digit utilization rate (under 10%) to get the best credit score.

What is the loan to debt ratio for a mortgage? ›

Generally speaking, most mortgage programs will require: A DTI ratio of 43% or less. This means a maximum of 43% of your gross monthly income should be going toward your overall monthly debts, including the new mortgage payment. Of that 43%, 28% or less should be dedicated to your new mortgage payment.

What 3 factors are considered in qualifying for a mortgage? ›

Top 5 Factors Mortgage Lenders Consider
  • The Size of Your Down Payment. When you're trying to buy a home, the more money you put down, the less you'll have to borrow from a lender. ...
  • Your Credit History. ...
  • Your Work History. ...
  • Your Debt-to-Income Ratio. ...
  • The Type of Loan You're Interested In.
Feb 1, 2023

What are the 3 Cs lenders consider when deciding whom to give credit to? ›

Examining the C's of Credit

For example, when it comes to actually applying for credit, the “three C's” of credit – capital, capacity, and character – are crucial. 1 Specifically: Capital is savings and assets that can be used as collateral for loans.

How does a lender judge the three Cs of credit? ›

Students classify those characteristics based on the three C's of credit (capacity, character, and collateral), assess the riskiness of lending to that individual based on these characteristics, and then decide whether or not to approve or deny the loan request.

What is most important when getting a mortgage? ›

Your main focus when buying a home should be securing a mortgage with low interest rates and a monthly payment that fits into your budget. To make it easier, experts recommend cleaning up your credit report and boosting your credit score before applying for a mortgage and saving up for a considerable down payment.

What is the most important thing to get a mortgage? ›

10 Things to know before getting a mortgage
  • Mortgage prequalification and mortgage preapproval aren't the same thing. ...
  • You'll pay more without a minimum 20% down payment. ...
  • Mortgage fees should be factored in. ...
  • The higher your credit score, the better. ...
  • Lenders value job stability. ...
  • Mortgage payments must fit your budget.

What is important in getting a mortgage? ›

Your Credit Score, Income And Assets

Therefore, a person who gets a mortgage will most likely be someone with a stable and reliable income, a debt-to-income ratio of less than 50% and a decent credit score (at least 580 for FHA or VA loans or 620 for conventional loans).

What 4 factors influence your credit? ›

The primary factors that affect your credit score include payment history, the amount of debt you owe, how long you've been using credit, new or recent credit, and types of credit used. Each factor is weighted differently in your score.

What are the 4 keys to establishing and maintaining good credit? ›

Establishing good credit habits is essential, so that you can build and improve your credit history and credit score.
  • Pay your bills on time. ...
  • Avoid maxing out credit accounts. ...
  • Manage your debt-to-income ratio. ...
  • Contribute to an emergency fund. ...
  • Practice making payments before taking on new debt. ...
  • Monitor your credit reports.

What type of credit is a mortgage? ›

Conventional Loan | Credit Score: 620

Conventional loans are issued through mortgage lenders, mortgage brokers, and credit unions. Conventional loans are the default option for home buyers because of their low rates and simple approvals.

Which type of credit is the most important? ›

FICO® Scores are used by 90% of top lenders, but even so, there's no single credit score or scoring system that's most important. In a very real way, the score that matters most is the one used by the lender willing to offer you the best lending terms.

What are the best types of credit to increase credit score? ›

Having both revolving and installment credit makes for a perfect duo because the two demonstrate your ability to manage different types of debt. And experts would agree: According to Experian, one of the three main credit bureaus, “an ideal credit mix includes a blend of revolving and installment credit.”

What is the most important largest factor of your credit score? ›

Payment history is the most important factor in maintaining a higher credit score. It accounts for 35% of your FICO score, which is the score most lenders look at. FICO considers your payment history as the leading predictor of whether you'll pay future debt on time.

How can I improve my credit capacity? ›

​10 tips to boost your creditworthiness
  1. Check out your credit file to see where you stand. ...
  2. Ensure your credit file is fair and accurate. ...
  3. Create a relationship with your bank. ...
  4. Have a credit card. ...
  5. Don't apply for too many credit cards. ...
  6. Pay your credit card and loans on time. ...
  7. Demonstrate general bill-paying reliability.

What are usually the most important credit requirements? ›

The most important factor of your FICO® Score , used by 90% of top lenders, is your payment history, or how you've managed your credit accounts. Close behind is the amounts owed—and more specifically how much of your available credit you're using—on your credit accounts. The three other factors carry less weight.

Why is it important to develop the 4Cs? ›

The 21st century learning skills are often called the 4 C's: critical thinking, creative thinking, communicating, and collaborating. These skills help students learn, and so they are vital to success in school and beyond. Critical thinking is focused, careful analysis of something to better understand it.

What are the benefits of the 4Cs? ›

The 4Cs (consumer, communication, cost, and convenience) help to ensure that your customer experiences are positive and consistent across all channels. The purpose of a marketing mix is to create a plan that addresses the needs and wants of your target market.

What is the most important section of your credit report and why? ›

Payment History: The most important information is the payment history, which determines 35% of a FICO score. This is a two-year record of account statuses (paid/past due), missed payments stay on the report for seven years. Information about how much was owed and how late the payment was also is included.

Why do banks ask for collateral while giving credit to a borrower short answer? ›

Collateral is an asset or form of physical wealth that the borrower owns like house, livestock, vehicle etc. It is against these assets that the banks provide loans to the borrower. The collateral serves as a security measure for the lender.

Is credit score required for collateral loan? ›

If you are applying for a collateral-free business loan, having a credit score of 700 or more is ideal. If you are applying for a secured business loan, your loan application may be approved with a lower credit score, say between 600 and 700 too.

Why do banks ask for collateral while giving credit to a borrower 2 *? ›

Collateral acts as a guarantee that the lender will receive back the amount lent even if the borrower does not repay the loan as agreed.

What are the 4 C's of mortgage loan application consideration What does each one stand for and mean to a homeowner? ›

Capital. Credit History. Capacity. Collateral: The infamous 4 C's of credit. Lender's review each of these concepts when determining whether or not you are a good candidate to lend a mortgage to.

What are the 4 C's analysis? ›

The 4Cs for marketing communications: Clarity; Credibility; Consistency and Competitiveness. What is it? The 4Cs (Clarity, Credibility, Consistency, Competitiveness) is most often used in marketing communications and was created by David Jobber and John Fahy in their book 'Foundations of Marketing' (2009).

What are the Cs of credit analysis? ›

Lenders will look at your creditworthiness, or how you've managed debt and whether you can take on more. One way to do this is by checking what's called the five C's of credit: character, capacity, capital, collateral and conditions.

What is a realistic credit limit? ›

Adam McCann, Financial Writer

A good credit limit is above $30,000, as that is the average credit card limit, according to Experian. To get a credit limit this high, you typically need an excellent credit score, a high income and little to no existing debt.

Should I pay off my credit card in full or leave a small balance? ›

It's a good idea to pay off your credit card balance in full whenever you're able. Carrying a monthly credit card balance can cost you in interest and increase your credit utilization rate, which is one factor used to calculate your credit scores.

What is the limit on a 50 000 salary credit card? ›

#1 Your Income/Salary:

Usual credit limit is 2X or 3X of your monthly income. Suppose your salary slip shows Rs. 50,000 per month, you can expect Rs. 1 Lakh – 1.5 Lakh credit limit.

Can you get a mortgage with 55% DTI? ›

There's not a single set of requirements for conventional loans, so the DTI requirement will depend on your personal situation and the exact loan you're applying for. However, you'll generally need a DTI of 50% or less to qualify for a conventional loan.

How much of my income should my mortgage be? ›

The 28% rule

The 28% mortgage rule states that you should spend 28% or less of your monthly gross income on your mortgage payment (e.g., principal, interest, taxes and insurance). To determine how much you can afford using this rule, multiply your monthly gross income by 28%.

What is the highest debt-to-income ratio for FHA? ›

Your PTI is the ratio of proposed monthly mortgage payments to monthly income. This is also referred to as front-end-debt ratio. For an FHA loan, a PTI ratio can be high as 40 percent if the borrower's credit score is 580 or higher.

What are the 4 Cs of a loan application? ›

Standards may differ from lender to lender, but there are four core components — the four C's — that lender will evaluate in determining whether they will make a loan: capacity, capital, collateral and credit.

What does Cs stand for in mortgage? ›

Lenders score your loan application by these 5 Cs—Capacity, Capital, Collateral, Conditions and Character. Learn what they are so you can improve your eligibility when you present yourself to lenders.

What are the four 4 classifications of loan? ›

Loans can be classified further into secured and unsecured, open-end and closed-end, and conventional types.

What are the four Cs used to assess underwriting? ›

“The 4 C's of Underwriting”- Credit, Capacity, Collateral and Capital. Guidelines and risk tolerances change, but the core criteria do not.

What are the four types of Cs? ›

Are you familiar with the Four Cs? I first discovered them in Yaval Noah Harari's “21 Lessons for the 21st Century.” They are: critical thinking, creativity, collaboration and communication. Knowing how to apply those four ideas will help prepare you to adapt and excel in your career, today and in our uncertain future.

What are the 5 Cs of mortgage underwriting? ›

One of the first things all lenders learn and use to make loan decisions are the “Five C's of Credit": Character, Conditions, Capital, Capacity, and Collateral. These are the criteria your prospective lender uses to determine whether to make you a loan (and on what terms).

What do underwriters look for in mortgage approval? ›

When trying to determine whether you have the means to pay off the loan, the underwriter will review your employment, income, debt and assets. They'll look at your savings, checking, 401k and IRA accounts, tax returns and other records of income, as well as your debt-to-income ratio.

How long does it take for the underwriter to make a decision? ›

How long does underwriting take? The underwriting process typically takes between three to six weeks. In many cases, a closing date for your loan and home purchase will be set based on how long the lender expects the mortgage underwriting process to take.

Do underwriters want to approve loans? ›

Underwriting involves the evaluation of your ability to repay the mortgage loan. An underwriter will approve or reject your mortgage loan application based on your credit history, employment history, assets, debts and other factors. It's all about whether that underwriter feels you can repay the loan that you want.

What type of loan is easiest to get? ›

The easiest loans to get approved for are payday loans, car title loans, pawnshop loans and personal loans with no credit check. These types of loans offer quick funding and have minimal requirements, so they're available to people with bad credit.

What makes a good loan? ›

A good loan has a reasonable repayment period.

The repayment period is the length of time you have to pay back the loan. A longer repayment period means lower monthly payments, but you'll pay more in interest over time. A shorter repayment period means higher monthly payments, but you'll pay less in interest over time.

What are 4 examples of loans? ›

Common examples include home purchase loans, auto loans, personal loans, and many student loans. Revolving loans allow you to borrow and repay repeatedly.

What are for 4 Cs for the evaluation of company's credit risk? ›

The “4 Cs” of credit—capacity, collateral, covenants, and character—provide a useful framework for evaluating credit risk. Credit analysis focuses on an issuer's ability to generate cash flow.

What are the Cs of underwriting? ›

The 5 Cs are Character, Capacity, Capital, Collateral, and Conditions. The 5 Cs are factored into most lenders' risk rating and pricing models to support effective loan structures and mitigate credit risk.

How does an underwriter approve a loan? ›

An underwriter will take an in-depth look at your credit and financial background in order to determine your eligibility. During this analysis, the bank, credit union or mortgage lender assesses whether you qualify for the loan before making a decision on your application.


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