Loan Approvals Made Easy

by Jay E. Ardolino

How does a mortgage lender decide to approve or deny an application for a first mortgage? Basically, there are four fundamental areas that a mortgage underwriter looks at when making his decisions. Those are commonly referred to as the "Four C's" of underwriting. They are: credit, character, capital and collateral.

Credit

The first C, credit, refers to qualifying for the mortgage payment based on your monthly income. The monthly housing expense, (principal and interest, plus one-twelfth of the annual taxes and insurance), cannot exceed a certain percentage of your income, usually 28 percent. As an example, if you earn $5,000 a month, your monthly housing expense cannot exceed $1,400, or 28% of $5,000. In addition, your total monthly debt (including credit cards, car payments, student loans and housing costs) cannot exceed 36 percent of your monthly income.

Character

The next area, character, has to do with how faithful applicants are in making their credit payments on time. This is considered the most crucial indicator, because if someone has paid credit cards, car payments and a previous mortgage on time, they will be more likely to pay their new mortgage on time as well.

Capital

The third C, capital, is a verification that the applicant has enough money available for the downpayment and closing costs. This information is received from your bank, or wherever the funds are coming from. Gifts from relatives can be used with a gift letter and verification that the money is available from the donor.

Collateral

Collateral refers to the home being purchased. An appraisal is done to ensure that the house is worth the price being paid. It is usually performed by an independent appraiser, using recent sales of comparable homes in the area to determine if your price is similar.

When applying for a mortgage, you can help your loan officer by applying as soon as possible. Supply as much information as possible at time of application. Information such as W-2 forms for the last two years, a recent paycheck stub and your last two monthly checking and savings account statements will help move your mortgage application through the processing system smoothly and quickly.

Finally, be up front about any credit problems you have had in the past. This gives the loan officer the opportunity to confront any negative credit history head on. Many times, credit problems can be easily explained. Don't let a credit blemish stop you from enjoying the benefits of homeownership.

Jay E. Ardolino is the Sales Manager with American Residential Mortgage Corp.,(now part of Chase Manhattan Mortgage).

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