What Are the Four C’s of Credit? How Lenders Qualify You for a Mortgage

There’s no doubt that one of the most important and often daunting steps in the homebuying process is qualifying for a mortgage. By understanding what lenders look for – the four C’s of credit – you can set yourself up for success and a smooth-sailing mortgage underwriting process. So, if you’re currently renting an apartment in San Francisco, looking at homes for sale in Austin, TX, or checking out another city where your money can go further, see how the four C’s of credit impacts the size of mortgage you can qualify for. 

What are the four C’s of credit?

1. Credit: Do you have a track record of consistently making payments on time?
2. Capacity: Are you able to pay back the loan?
3. Capital: Do you have assets, cash reserves, or other funds?
4. Collateral: What property or possessions can you pledge as security against the loan?

While different lenders may have their own specific qualifications for securing a home loan, there are four main factors that they’ll review and analyze during the mortgage underwriting process. These main factors are credit, capacity, capital, and collateral. 

Let’s dive deeper into each of the four C’s of credit.

1) Credit

When applying for a mortgage, lenders will review your credit history and credit score to analyze your record of paying bills. They want to understand your overall history as a borrower and see how you manage your other debts and monthly payments.

Your credit score can be a make or break factor for a mortgage loan approval. Oftentimes, there will be minimum credit score requirements for a mortgage, and your credit score may determine the size of the loan amount you’re qualified for in addition to the interest rate on the loan. 

“When purchasing a home, lenders will pull a credit report to determine your credit score and to see the debt you are carrying,” says Kevin Tinsley of All Tech Mortgage. “What some people might not realize is the data on the credit report may be 1-2 months old. So in preparing to purchase a home, get an early start if you are planning to pay down credit card balances or plan to pay off any current loans. That way when the lender pulls your report it will reflect these accounts being paid off or down, which will improve your credit score.”

If you don’t have a good credit score and you’re planning to buy a home in the near future, it’s a good idea to get ahead and focus on improving your credit score as soon as possible. “One of the biggest damages many people do to their credit scores is by carrying high balances on their credit card(s). Keeping the card’s balance below 30% of the available credit limits is always the goal,” says Joe Metzler, Senior Loan Officer at Cambria Mortgage. “If you use your credit card for convenience and typically pay it off each month in full, don’t wait for the statement to come out, then pay. Rather, pay the card down before the statement actually comes out.”