“I have a dumb question. How does a bank really decide if they’re going to make me a loan? What do they look at?”
Answer:
When a bank decides if they’re going to approve a loan (the decision process is called “underwriting”), they look at the “three C’s”:
1. Character: Mainly your credit history (FICO score), with some attitude thrown in. Lenders often request a “letter of explanation” for a past credit glitch or a “letter of motivation” for a marginal borrower. The attitude of those letters can actually make a difference!
2. Capacity: “Can you afford it?” …based on income, job history, current debt load, savings history, and payment shock (i.e. going from $900 rent to a $3,000 mortgage can be a jolt.)
3. Collateral: Appraise the property to be sure it’s worth the price.
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