Could You Qualify? The 4 Cs of Mortgage Lending
You're thinking about buying a home, but you're worried by the reports of how tough it is to qualify for a mortgage these days and how big a down payment is required. Yes, credit standards are higher now than they were a few years ago. But they actually are about the same as in the mid-1990s. Factor in today's historically low interest rates and current home prices, and affordable mortgages are within reach for many qualified borrowers who may have been hesitant to enter the market.
Although owning a home is not for everyone, and renting might be a better option for some, here are several facts to keep in mind if you choose to pursue homeownership.
What Do Lenders Look For?
It's important to remember that Freddie Mac operates only in the secondary mortgage market; we buy mortgages that meet our requirements from lenders, and the funds that the lenders receive from us can be used to extend loans to other borrowers. The lenders decide the standards they ultimately apply in making loans.
When deciding whether to extend a loan, the industry is taking a back-to-basics approach and evaluating the four Cs:
Capacity to pay back the loan. Lenders look at your income, employment history, savings, and monthly debt payments, such as credit card charges and other financial obligations.
Capital. Lenders consider the money and savings you have readily available plus investments, properties, and other assets that could be sold fairly quickly for cash. Having these reserves proves that you can manage your money and have funds, in addition to your income, to pay the debt.
Collateral. Lenders take into account the value of the property and other possessions you are pledging as security against the loan.
Credit. Lenders check your credit score and history to assess your record of paying bills and other debts on time. (Even if you don't plan to buy a home now, it's always a good idea to build and maintain strong credit. Landlords often check it to make sure that you can pay the rent; it's also important if you want to apply for a mortgage or other credit line in the future, such as a student loan, car loan, or credit card.)
No one benefits from putting you in a home you can't afford. That's why Freddie Mac is advancing responsible lending practices that help create sustainable homeownership opportunities. We believe our credit standards are sound and reasonable. In fact, many of the loans that lenders submit to us for purchase fall comfortably within our credit parameters. So don't assume that you won't meet the requirements. If you are thinking about buying, explore the opportunity.
Want to Know More?
Visit the About Homeownership tab on Freddie Mac's web site for valuable information, resources, and tools to help you assess your options and understand what is involved in looking for, buying, and maintaining your own home.
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