Buyer ServiceHome Buyers

The 3 C’s in Underwriting

What you need to know when shopping for a loan. We answer frequently asked questions about financing.

Dec 29 2016

Searching for a new home can be an exciting, yet nerve-wracking venture. But the journey will be easier if you learn more about the process.

The financing process starts after you find your perfect home. And when it comes to financing, the 3 C’s are crucial. Why? Because the 3 C’s determine whether or not your lender approves your application.

What Are the 3 C’s?

Credit. Capacity. Collateral.

How Is My Credit Evaluated?

A lender typically begins the loan approval (underwriting) process with a combined credit report from the major credit reporting agencies: Experian, Trans-Union and Equifax. A lender will also look to see whether or not you’ve had any foreclosures, bankruptcies, liens and/or judgments, delinquencies on a credit account including repossessions, collections or charge-offs (debt written off by a creditor) and credit account type, limit and payments.

Your credit doesn’t need to be perfect to buy a home, but an excellent credit can be beneficial when it comes to financing.

What Does Capacity Mean?

Your capacity simply refers to your ability to pay back the loan. To make this determination the lender will use debt to income ratio and the housing ratio when underwriting your loan application. The lender will look at your income, debts and asset to determine your ability to make the proposed mortgage payment.

Why Does Collateral Matter?

Collateral refers to the property you are purchasing. The lender will most likely order the appraisal of the home to ensure the loan amount does not exceed the appraised market value. The lender also looks to the value of the property to recover any losses in the event you fail to pay the mortgage.

How Long Does the Underwriting Process Take?

There is no set time frame for your lender to underwrite your loan application and the process can vary among financial institutions. It can take as few as 48 hours to two weeks, sometimes even more.

Does Underwriting Impact the Closing Date?

Yes. The closing date should not be set until all agreements and conditions of the sale have been completed. In addition to having funds towards the purchase, all inspections, and seller obligations need to be completed before the sale can be finalized. This is where a savvy agent can help to facilitate a successful closing.

Should I Sell My Home Before Applying for a New Loan?

It depends. Typically, your total monthly housing payment, consisting of the principal, interest, taxes and insurance (PITI), should be no more than 28% of your gross monthly income. Your debt ratio should be no more than 36% of your gross monthly income. Two mortgages may very well throw your ratios above these figures.

Depending upon market conditions you could make an offer contingent on the sale of your existing home. Your agent can advise you on this particular strategy.

Need Help?

A real estate professional has a wealth of knowledge to get the best possible property at the best price. A good agent can:

  • Help you find suitable financing
  • Explain the market conditions
  • Show you how much you can afford
  • Negotiate on your behalf
  • Ensure that everything flows smoothly on the closing date
  • Be your “go-to” person for any and all questions about the home buying process
  • Consult an agent with any questions and for help that is specific to your particular situation.

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