In the United States, credit took roots in the early 1920s as consumer demanded high valued manufactured products. Credit was realized in installment credit with a fixed number of payments such as revolving credit that legalized loan payments. However, laws were placed to prevent lenders from taking advantage of the working class through loan sharks. The ability to track credit came through the use of social security numbers (SSNs). SSNs are generally issued to consumers not long after their birth and offer the ability to track debt to develop a national system for lenders to decide if credit will be issued to consumers.
Today, credit is utilized in countless methods such as buying a home, renting an apartment or home, credit cards, loans, and even employment (the named lender is utilized to represent all credit aspects as someone is lending you something in most instances). The person or business checking an individual’s credit wants to ensure a loan will be paid back or on-time payments by reviewing past history. Yet, past history does not tell the entire story. There are the 4 C’s of credit – capital, capacity, credit history, and collateral. Contact Credit Care, LLC today to learn more!
Your capital is the amount of cash you have available. The more cash available in savings accounts, bonds, certificates of deposit, and other instances where the money can be accessed quickly is the more comfortable a lender is able to lend funds. Why? Lenders are projecting how you are able to deal with emergencies should they arise after you move into their property – still make on-time payments, etc.
You will be asked for mortgage and rent purposes, how much capital you have available to you and where it is being held for a verification of deposit. You will also need to show enough capital to pay for:
- Down Payment
- Security Deposit & other fees (renting)
- Loan Fees
- Closing Cost (if applicable)
- Escrow impounds (advance payments for property taxes and insurance)
- Moving expenses
The ability for you to earn enough income to make payments to the lender after your living expenses are important and referred to as capacity. Lenders require you to establish your ability to repay your loan through capacity. The ability to repay is calculated by your capacity by reviewing your current income, income history, and the amount you owe other lenders.
A lender reviews your current income from your employer or self- employment. If you are married, your spouse’s income is concerned as well. Your income is reviewed to ensure you can pay your living expenses and still live comfortably after all bills are paid because emergencies arise. Your gross income is reviewed which is the amount earned before taxes. Steady incomes are countable and a lender can consider it prior to making a decision.
As discussed, lenders review your current and future income history but also your past earnings as well to understand:
- Can you show that you have held a steady job and earned a stable income for the past two years or more?
- How long have you held your current job?
- How much has your income increased over the past years?
- Is it likely that you will continue to be employed at the current or higher rate in the near future?
In addition, a lender will ask for verification of employment. You can show your pay stubs, tax returns or other kinds of proof. A lender may contact your past and present employers to verify how much you earn and that you are likely to continue working there in the future.
The Amount You Owe
A lender will look at all your creditor debts, such as monthly payments on loans, charge cards, child support, etc. However, lenders do not include certain types of monthly bills, such as telephone and utility bills, auto and life insurance, retirement and savings contributions, income and Social Security taxes and union dues.
A lender wants to predict whether you will repay your loan. A good indicator is how you have handled your other debts. If you have always repaid the money you have borrowed on time, generally pay cash for things and save credit cards for large purchases and emergencies, you are probably a good credit risk. But, if you have many loans and credit cards and struggle to make the minimum payments that are due, you may need to improve your credit history before you apply for a home loan.
A lender orders a copy of your credit report to learn about your credit history.
Some people do not have a credit history because they have never used a credit card or borrowed money from a bank. Even if you do not have traditional credit, you may be able to get a loan for a home purchase. It is also important that you talk with a credit counselor prior to applying for a mortgage, renting, employment, credit cards, and similar to ensure you are on the right track as a denial of credit can hurt your credit score. Contact Credit Care, LLC today to learn more!
Your new home will be collateral or extra security for your loan. Your lender will look carefully at the value and condition of the house to make sure it is worth at least as much money as you are borrowing and to be sure that the house does not have any major repair problems that could cost more money than you planned.
Lenders determine value by hiring an appraiser. You will be asked to pay for the cost of the appraisal when you apply for a loan. The appraiser uses his or her professional training to estimate the fair market value of the house. Because lenders want you to invest some of your own money in the house, they will generally lend less than the fair market value. The appraisal is used to calculate a loan‑to‑value ratio, which helps the lender determine how much to lend and tells you how much of a down payment you will need.
Lenders review the appraisal not just for value but also to make sure the house is in acceptable condition. If the appraisal shows that any major parts of the house are not in good shape, the lender may agree to make the loan only if the part is fixed. This is called property condition contingency. It is a protection for you as well as the lenders. Contact Credit Care, LLC today to learn more!