Grading a diamond or qualifying someone for a HOME LOAN – the 4 C’s determinants!

Understanding how lenders rate you according to the 4C’s will help you prepare your loan application and will define if you are successful or not!

It is incredible that whether you want to qualify / grade a diamond or you want to qualify someone for a home loan- you need to look at the 4C’s determinants- Cut, Colour, Clarity and Carat for a diamond- Character, Capacity, Collateral and Capital for qualification of a loan.

The 4C’s determinants:

Character:

Character refers to how credible you are as a potential borrower! Have you been responsible in paying your debts- your credit card or your car loan ON TIME? Can you give the lenders comfort around your ability to save or pay your rent on time? They will look at your loan/ and credit card statements or even your rental ledger to build your financial profile. Lenders requirements – 3 months of credit cards statements and 6 months of other loans/ savings statements. Your personal profile is also taken into account – are you single? Are you married or de facto? How many assets have you got? Do you work? Are you full time part time or a contract? Do you live at your parents’ place or do you rent? Everyone is unique as an individual.

Capacity:

Capacity refers to your ability to service or repay the loan being applied for. You need to prove to the lender that you can afford the repayments based on the current rate and even should the interest rate go up. Lenders will assess you at a higher interest rate- e.g 2%-2.5% higher in their servicing calculator. Do you also have a stable job and if you just changed jobs is it in the same industry? Understanding where your income comes from and where it goes is crucial. Brokers are required to ask their clients for a detailed break- down of their budget nowadays. It is a broker’s duty of care to prove that a loan is not unsuitable to their clients.

Collateral:

The dictionary defines Collateral as “an asset pledged as a security for repayment of a loan”- to be forfeited in the event of a default. The lender will always perform some kind of a valuation on the property to be used as security. Should the borrower fail in making the repayments, the lender will take the property and sell it to recoup its losses. Click on this link for a FREE Core Logic property valuation report worth $50 on your residential property (Compliment of the author)

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Capital:

Capital in respect of borrowing refers to the amount of deposit you have saved and have available to put down to buy your property. Lenders like to see that you have 20% of the total purchase price. If you don’t, then they perceive that they are exposed in the event that you default. LMI or Lenders Mortgage Insurance is a one- off premium paid by the borrower if he does not have the required 20% but it only protects the lender not the borrower.

As you can see, there are a lot of factors involved in qualifying for a loan. Are you the perfect “diamond” the lender is looking for? How do you rate? Have you got the perfect 4C’s?

Contact me and let me advise you on how to best prepare your loan application to look as priceless and clear cut as the diamond in the picture.

Written by Corinne Jacquin- Mortgage Broker- Lending Specialist – from Ma Maison Advisory Services- Credit Representative No 478751- Authorised under eChoice Home loans- Credit Licence no 390502