As it’s a great time to buy, and the Charleston AFB market is filled with new buyers….I thought we should review the basics of home loans. While certain things change over the years, “The 4 C’s of Underwriting- Capacity, Credit, Cash, and Collateral”, remain basically the same. The following is an explanation of the 4 C’s, courtesy of the KCM group.
CAPACITY It considers the borrower’s ability to repay the mortgage. Lenders look at two calculations: the Housing Ratio (front end ratio) and the Debt Ratio (back end ratio). The Housing Ratio is the % of the mortgage payment divided by your gross monthly income. A good Housing Ratio/front end ratio is 28% or less; although many loans are approved at a higher number.
The Debt Ratio/back end ratio starts with that mortgage payment calculation from the Housing Ratio and adds to it your recurring debts that would show up on your credit report, such as car loans, student loans, etc. A good Debt Ratio/back ratio would be 40% or less.
CREDIT By reviewing your credit history (payment history, total debt compared to total available debt, revolving credit vs. installment debt outstanding) a credit score is assigned to each borrower. The higher the score, the lower the risk – and this usually results in better loan terms for the borrower. Scores below 620 are difficult; scores from 620-660 are mediocre; those from 660-720 are considered good; and above 720 are very good.
CASH There are two components – cash in the deal and cash in reserves. Simply put, the bigger your down payment, the stronger the loan application. At the same time, the more money you have in reserve after closing, the less likely you are to default. Two borrowers with the same profile have different risk levels if one has $50,000 in the bank after closing and the other has $50.
COLLATERAL refers to the value (appraisal) of your home. It considers many factors – sales of comparable homes, location of the home, size of the home, condition of the home, cost to rebuild the home, and even rental income options. In today’s Charleston AFB market, appraisers tend to be conservative in their evaluations. Appraisals are really the only one of the 4 C’s that can’t be determined ahead of time in most cases.
IN SUMMARY
While each of the 4 C’s are important, it’s a combination of all 4 that really matters. A strong income ratio and a large down payment can help offset credit issues, and good credit and income can offset lower down payments. It’s important to work with an experienced Charleston AFB loan officer; someone who can help you through the process and find the best option for your situation.
About Military Homes of CharlestonMilitary Homes of Charleston is part of the Exit Realty Charleston Group and is a full-service real estate team based in Charleston , SC. Charleston
Torri Jacobsen, Military Homes of CharlestonBuying or selling a home doesn’t have to be hard, but choosing the right Realtor DOES make a difference. I specialize in making first-time home buying a great experience for military families moving to the Charleston , SC
Jodie Hurt, Military Homes of Charleston
I specialize in helping military families enjoy a smooth PCS in and out ofCharleston
I specialize in helping military families enjoy a smooth PCS in and out of
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