Most people are familiar with the term credit. Credit is your reputation for paying bills on time that makes it possible for you to obtain other loans or goods. Credit is determined by your income, your payment history, debt payments and by any bankruptcies.

Credit is a crucial component in determining whether or not you are granted a home loan or mortgage. However, a less than perfect credit rating does not necessarily mean that you will be denied a mortgage.

It is wise to discuss any credit problems you have had with a mortgage professional. Often there are legitimate reasons that have caused a borrower to have had credit problems. If the borrower has dealt with the problems and had a satisfactory credit record for 12 months or longer, then the chances of being granted a mortgage by many mortgage professionals are good.

The Four C's
There are other factors in addition to your credit rating that affect your credit worthiness in the eyes of a mortgage professional. The four C's are Credit, Capacity, Collateral and Character.

Capacity
Capacity is a term used to describe your ability or capacity to repay a loan. After monthly mortgage payments do you still have enough money left over to live on? Your monthly housing payment comprised of the mortgage, property tax and insurance is added to your other monthly debts such as credit cards and car loans. This total is then divided by your gross monthly income.

The end result of this ratio known as the "Debt to Income" ratio and sometimes called the Fannie Mae guideline, should give a percentage of no more than 36% of your income being used for monthly debts. However, some lenders who work with us will allow that figure to go to 40% or higher if there are compensating factors such as the borrower having an excellent credit history and putting down a large down payment.

Collateral
Your property has a real value and this is known as its collateral. Lenders will ask you for an appraisal on the property you are buying as you will "pledge" it as your collateral for the loan. If you fail to make your mortgage payments, the lender will seize your property and then sell it to satisfy the debt still owing.

Character
An underwriter will take all of your financial information into consideration such as your job stability and your credit history and then make a subjective determination of your over-all financial situation called "character".