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Credit Understanding

Feb 20, 2008
When a lender looks at an applicant's loan request, they normally look at three characteristics known as the Three C's of Credit. The three C's are character, capacity and collateral.

It is not unusual for a lender to look at credit reports from all three credit reporting agencies: TransUnion, Equifax or Experian. They will look at your credit history and paying habits to determine your character.

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.

Collateral: This includes everything you own even if it is not paid off yet. A borrower with more "stuff" (equity) has a better chance of getting a loan than someone with less. When completing a loan application, you should list all assets including household goods, jewlery, automobiles, power equipment, special tools, or anything considered to have value.

Capacity: Capacity means simply your ability to repay a loan. Lenders calculate a debt ratio to see how likely you will repay the loan. In mortgage underwriting the underwriter will look at two ratios known as your front and back ratio.

Front ratio refers to your total housing expense which includes Principle and Interest, Taxes, and Mortgage Insurance as a percent of your gross monthly income. If your monthly gross income is $4000 and your Housing expense is $1102; your front ratio is 27.55%.

Your Back ratio is your total housing payment (PITI) plus all other revolving and Installment account payments divided by your gross monthly income. The lower your debt ratios are the better chance you have of being approved and receiving a lower interest rate.

All three C's play an important part in granting credit. Applicants with higher credit scores/ better character are more likely to obtain a loan with good terms. Borrowers with more assets will be more likely to get financing with better terms than someone with fewer assets. Lastly, clients with low debt to income ratios are looked on more favorably.
About the Author
Jerry Sanders can get you out of that ARM and into a fixed rate mortgage now. The rates have never been lower. Pre-qualify on line at Peach State Mortgage or call 800 533 0728 for a personal consultation. Licensed in Florida, Georgia, and Tennessee.
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