A young couple applying for a mortgage loan after learning about the 5 Cs of Homebuying

The 5 Cs of Homebuying: How to Qualify for a Mortgage Loan

November 18, 2021
When applying for a mortgage loan, there are 5 main criteria mortgage lenders take into consideration.

Buying a house is a big undertaking, especially when you’re trying to qualify for a mortgage at the same time. Just remember the “5 Cs:” Cash, credit, collateral, capacity to pay, and change in payment.

1. Cash

You’ve heard the saying “cash is king” – and, in many cases, it’s true. A major part of qualifying for a home loan is cash, or how much money you have. Lenders will examine things like…

  • Your net worth
  • Amount of money in checking accounts and savings accounts
  • Down payment amount

A good rule of thumb is to have at least 3.5% of your purchase price set aside before you apply for a loan. This could go toward your down payment, closing costs, or other fees. Your actual required down payment may vary depending on your loan program.

Additionally, it’s a good idea to have 2-3 months of house payments set aside in the bank after closing as an emergency fund.

2. Credit

Your credit score is one of the most important factors in getting a mortgage. A good credit score opens doors to more options – like niche home loan programs, lower down payment requirements, or a lower interest rate – but there are plenty of options for those with less-than-perfect credit, too.

Your credit score is made up of several factors, such as:

  • Payment history
  • Amounts owed
  • Length of credit history
  • Types of credit used
  • New credit

To put your best foot forward, make sure you have at least 12 months of on-time payments to show for. It also helps to have multiple open credit lines or loans that have been reporting for the past 24 months to show a variety of credit sources and longevity of credit.

3. Collateral

The property you’re planning to purchase itself can make a difference in the loan you qualify for. This includes factors such as:

  • What type of real estate are you buying? (Single-family home, condo, town home, etc.)
  • What is the current market value of the real estate, and how was this determined?
  • What is the structure’s current condition and marketability?

4. Capacity to Pay (Work and Income)

Like credit, capacity to pay is another major factor in qualifying for a mortgage loan. Your lender needs to make sure you’ll be able to afford your monthly mortgage payments.

To prove your ability to pay your loan back, lenders will examine:

  • Your monthly income
  • Your income history (How long have you been with your current employer?)
  • Your debt-to-income ratio (How much of your monthly income goes toward your monthly debts, such as housing, auto loans, credit cards, student loans, etc.)

5. Change of Payment

Finally, the change in payment is something lenders will consider when going over your mortgage loan options. If your monthly housing payment is increasing, you’ll need to ensure you have the means to pay for the difference without causing financial hardship.

Any monthly payment increase should be proportionate to your income and savings history. Buying a home should not create problems paying for basic needs such as groceries, utilities, gas, clothing, etc.

Ready to get started and learn more about which loan programs you may be eligible for? Contact a mortgage professional in your area today.