When you go in to apply for a loan, a lender will go through several things as they determine whether or not you will qualify for the loan. A lender will look at the 5 C's of Credit. Those 5 C's are character, collateral, capacity, capital, and conditions. Each on of these factors will be used in the underwriting process which will determine the likelihood of loan approval.

Character is the integrity of the loan applicant. There are a few different things that come into play with judging the character of the applicant. The credit score of the borrow will play into this. If the borrow has a high credit score, the borrower often will have good character as they have made their payments in a timely fashion over the years leading up to the application. A low credit score often is an effect of the borrower not making their payments or having some other derogatory information out their, which often times shows a lack of character. Most times, the lender will also have a personal knowledge of the applicant so that will play a role in the application as well. Character is often times considered the most important of the 5 C's.

Collateral is assets used to secure the debts. On a mortgage application, the collateral is usually the property you are purchasing or refinancing. With collateral, an appraisal will be done to determine the value of the collateral. A lender will not finance more than 100% of appraised value or the purchase price, whichever is lower.

The borrower's repayment capacity plays an important role in determine loan approval. If you do not have the ability to repay your mortgage, you will not receive an approval from the lender. Your capacity will be determined by your debt ratio. The debt ratio is your monthly payment obligations divided by your monthly gross income. If your ratios fall into the lenders approved range, you should be in good position to get loan approval.

Capital is the net worth of the borrower. On the loan application, you will fill in all your assets and liabilities. Your net worth is determined by your total assets less your total liabilities. While it is not absolutely necessary to have a positive net worth, it is beneficial. Another part of the capital factor is your contribution to the transaction, or your down payment. Most lenders will require you to contribute a minimum of $500.00 or to cover the closing costs if seller concessions are not made on the sale. The more you put into the transaction, the better the odds are of approval as you have more into the home, so you also have more to lose if the loan goes into default.

The condition factor is based on the current state of the economy. In the economy today, the conditions are not as good for approval. Right now, we are in the midst of a housing slump and foreclosures are rising. This has made lenders are tentative on granting loans, especially to those in the sub prime market. The current state of the real estate market has also caused lenders to ask even the strong borrowers to contribute more to the real estate transaction.

These are some of the primary factors when a lender is considering approval. The better things are in each of these categories the better the chance you have for loan approval so keep your financial affairs in order and you will make it easier for yourself to get that home of your dreams.

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