For this month, we will be continuing to take a look at the five Cs of credit. To refresh your memories, the five Cs include credit, capacity (ability to make the payments), capital (down payment), character (length of employment, savings history and other factors that supplement credit history) and collateral (assets owned in addition to down payment). In previous columns, we took a look at what lenders look at when reviewing credit, capacity and capital.
The next one we will explore is character. With other areas we have covered, things are a little more objective. We have hard numbers to measure things with, such as beacon scores, debt service ratios, down payment percentages, etc. With character, things get a little more subjective. When analyzing character, a loan underwriter will review all of the information in the application and see how everything “fits” together. This will involve looking at the other areas and seeing how everything looks when looking at the whole picture.
A good example of this is a borrower’s employment history. While employment is looked at in capacity, the underwriter will look again in regard to character. In capacity it is all about whether the numbers add up (i.e. Do you make enough to be able to pay your obligations?). With character, the underwriter will look at the industry you work in, how long you have worked in that industry, how many different employers you have worked for, etc. The reason it gets more subjective is that it is difficult to set criteria because there are so many variables. For example, someone with multiple employers within a relatively short time period might seem like too high of a risk. But if that person works in an industry where that is normal, then this might be overlooked.
Another example is savings history. One thing that a lender will analyze in regards to character is a person’s net worth. What this shows is a person’s propensity to save versus spend. If a person has shown a good savings history, it might be the difference between the loan being approved or declined. Again, there is no firm number or rule of thumb as to how much of a net worth a person needs to have; it is just a matter of how everything fits together.
I could keep giving more examples, but I think you get the point. Character is where the lender takes all of the pieces, puts them together and sees how things look. It is the big picture test. Fortunately, a good mortgage professional will be able to give you an idea of how things look while you are doing the application. Often even if something does stand out as a negative, if there is a reasonable explanation for it, this can be sent in in the application notes so it does not become an issue for the underwriter. So having an experienced mortgage professional can sometimes be the difference between an approval or a decline.
Well we are winding down in our review of the five Cs of credit. Now we have looked at credit, capacity, capital and character. Next month we will have a look at the final C, collateral.