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The Three “C’s”

A conventional mortgage lender goes more by the book, making a decision on whether to lend or not based on your numerical FICO score and a policy that is set in stone. Remember the banker played by Jimmy Stewart in “It’s A Wonderful Life?” He made loans to people that didn’t meet the guidelines because he trusted them and had reason to believe that they would be a good risk, despite the fact that they didn’t fit into a narrow set of guidelines.

You’ll probably never find a banker as kind-hearted as he in real life, but subprime lenders are much more able to make individual judgment calls like that. Instead of going strictly by the numbers, they will go by the time-tested “three “C’s”: capacity, capital, and character.

Of course, your credit score will still figure highly into the mix, but there are other things that can put you over the top if you wouldn’t otherwise fit the bill.

“Capacity” is your ability to earn income and pay back your loans. If you’ve held a steady job for several years, and are not burdened with a high level of debt already, you are said to have better capacity. Someone who has switched jobs every few months, and has gone through periods of unemployment, lacks capacity, even if that person happens to have a great job at the moment he or she applies for the loan. Having held a great job for three months is not nearly as good as having held a mediocre job for two years.

That’s not to say you shouldn’t take advantage of opportunities for advancement, career counselors will tell you to always be on the lookout for advancement. But wait until you’ve held your new job for a year before applying for that mortgage.

“Capital” is the total amount of real value you can put your hands on. It reassures the banker that if you fall on hard times, you’ll have something to sell or mortgage so you will be able to continue making payments. This includes equity in your home, as well as stocks, bonds, automobiles, life insurance, vested retirement plans, or anything else that can be converted to cash.

The last element, “character,” is the big judgment call. Do you take your obligations seriously? Pay your bills on time? Volunteer at the local soup kitchen? There are certain questions a banker is not allowed to ask, and with good reason, but if the banker happens to know that you are a deacon in his church, it certainly can’t hurt.

This is also where those elements that are intangible come in, for instance, how do you come across during your meeting? Small things, like dressing professionally, being polite and courteous, and being upfront and honest about your financial situation will leave your banker with a good impression that just may put you over the line if you’re a marginal case.