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The four "C's" that lender look for in making a private money mortgage.

Lenders will review four crucial factors before providing you with the loan you are seeking, frequently referred to the “Four C’s”.

Your Credit. So many loans over the past few years were predicated on the FICO score of the borrowers. The score as a firm indication of the way you have paid your obligations in the in the past and a good reference point as to how you will pay these obligations in the future. But that is not the only consideration that they use.

The Collateral. Quite simply the overall condition, marketability and value of the property that you are planning on encumbering. .

Your Capacity. Is your income sufficient to retire your current debts and the proposed debt on the property.

Commitment. How much of your own money are you putting into the deal. Are you willing to offer additional collateral.

Credit

So much of current lending is predicated on you credit history .Chance are that if you’ve paid your bills on time in the past, unless there is some unforeseen circumstance, you will most likely pay them on time in the future. Conversely, someone with damaged credit has shown a history of not paying their bills, for any number of reasons. For example and unforeseen medical crisis not covered by health insurance, or the borrower did not have health insurance. Divorce, death in the family, a failed business or job relocation are also factors that would be considered. .

If there is a consistent track record of failure to pay bills on time, car repossessions, credit card write-offs, unpaid utility bills or cable bills, etc. you would be classified as a non-prime borrower and would expect to pay the appropriate “risk premium” in order to get the loan you are looking for.

Collateral

In the lenders mind, this is probably the most important criteria that will be used in determining if they will do the loan or not. Simply put, if you didn’t repay the loan and the lender had to foreclose the property, is it worth enough to retire the debt when they sold it. Their concern is the overall loan to value ratio. In this case you loan request will be a proportion of the total value of the property. For example; if the home has a market value of $200,000 and you want to borrow $150,000 on a new first mortgage, the loan to value ratio would be 75%.

Most lenders want to see you have an equity cushion in the deal. If the borrower has an equity stake of 25% , there is a good likelihood that you’ll do everything possible to protect that equity. On the other hand, if you have no equity in the deal, you odds of defaulting are greatly increased.

While most mortgage lenders will lend you a certain loan to value on a particular property, they are usually bound to lend on the appraisal value or the purchase price, which ever is less. A private money mortgage lender will usually lend on a percentage of the appraisal value. This is extremely important when purchasing a property that is substantially below the appraisal value.

Again the lender is look at the loan to value ratio. If they had foreclose on a loan because of borrower default, they will not only want to recover the principal outstanding, but also their legal fees, cost of sale and unpaid interest.

Capacity

Your ability to retire the debt in a timely manner is also a factor in the loan. Much of the current mortgage legislation concerns whether or not a borrower can afford the loan that they were given. Job history, consistency, your other monthly obligations and your overall income play into the debt ratio that you lender will allow. The debt ratios used are referred to as front end ratios and back end ratios.

Front end ratio. This is the percentage of your proposed mortgage payment to your income. It includes an allocation for principal, interest, taxes and insurance.

Back end ratio This would include the housing payment mentioned above as well as all of you other monthly obligations.

Commitment

Commitment is displayed by either putting down a substantial down payment on a purchase transaction, or leaving a substantial equity cushion on a refinance transaction. If you are purchasing a home for $200,000 home and put down $50,000 you have made a substantial commitment and will not lightly walk away from that $50,000. On the other hand, those with little or no money of their own invested are much more likely to walk away from your obligations in a pinch. High loan to value loans consistently show higher levels of default.

 

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