Insider's Guide to Credit

Managing your credit score can be confusing, but what lenders focus on, and what you should focus on as well, are the three Cs:  credit, capacity, and collateral. Translation—your spending habits, assets, and income. Let’s go through each of these individually to get a better understanding of how your credit situation is viewed by lenders:

  1. Credit. Creditworthiness is based the history of how you have managed your finances—your experience with having and paying back your debt. Your score is recorded by the three main credit bureaus – Experian, TransUnion, and Equifax. If your scores are all different, then the credit score that is in the “middle” will be used as your credit score for a mortgage.
    • Insider tip #1 - missing payments and late payments hurt your credit. Paying on time or early is the best way to boost your score.
    • Insider tip #2 - having high balances on credit cards hurt your credit. Keeping your credit card balances under 30% of your credit limit can help increase your score.
  2. Capacity. Capacity is your combination of expenses, or money going out, relative to your earnings/income, or money coming in. This helps lenders determine your debt-to-income ratio, or your “capacity” to borrow more money. For example, if you earn $5,000 a month and your total monthly debts (car payments, student loans, credit cards, etc.) is $1,900, then your debt-to-income ratio is 38%, using the formula $1,900/$5,000.
  3. Collateral. Having assets or capital is a security or guarantee that can be collected in the event that the loan is not repaid is called “collateral”. Different collateral types, such as a mortgage loan, automobile loan, or a department store credit card are given different weight or value that can raise or lower your credit score.

Take the next step:

Here at Mortgage Lenders of America, we specialize in multiple loan programs that have varying standards for the three Cs. The best way to determine which loan program is right for you would be to contact an experienced loan officer who can help you get started on your path to homeownership today. 

 Other Resources:

How to Get Your Credit Mortgage Ready

When Is It Right to Buy?