When you are thinking about buying a home it’s important to understand the loan approval process. Part of that is knowing how lenders assess your creditworthiness for a mortgage loan. Lenders generally use what is called the 5 Cs of Credit which combined make up your credit profile.

Character: As a lender reviews your mortgage loan application, they’re looking for clues into your financial character. This includes things such as a record of you paying your bills on time and a continuous employment history.

Improving your credit character:


• Check your credit report regularly to ensure there isn’t any incorrect information.
• Consider setting up automatic payments on recurring bills to ensure they are paid on time each month.

Capacity: A lender will want to know if you can repay your loan. They will look at all your outstanding debts and compare that total to your before-tax income. This is called your debt-to-income (DTI) ratio.

Improving your capacity:


• Look at how you can pay down your debt.
• Consider ways you can have stable income to show your pay will continue to be consistent.

Capital: A lender will look at the amount of money you are prepared to put toward your home purchase. They may also look at your savings and any other investments you have.

Improving your capital:


• A large down payment may not be necessary to buy a home. Some down payment requirements are as low as 3 percent. Plus, there are down payment assistance options that you may qualify for from CHFA and other organizations.

Collateral: A lender may consider the asset you own and are pledging as collateral. It gives a lender some reassurance that if you can’t repay your debt, the lender can sell your asset to get their money back.

Conditions: A lender may look at external factors beyond your personal situation such as economic and market conditions and how those could impact your finances in the future. They will also look at the conditions and terms that come with the loan. 

You can find additional resources to help you understand credit on CHFA's website (PDF). 

CHFA was proud to support Project I See You with a $100,000 donation to support women in Colorado on their journey to homeownership. Project I See You is a 501(c)3 nonprofit dedicated to helping women take ownership over their lives and radically transforming the communities around them. The nonprofit reaches women across diverse cultural, racial, and socioeconomic barriers. Its Shared Power Initiative supports women to become first-time homeowners through grants and a network of support. Find out how to apply for Project I See You homeownership funds here.

Colorado Housing and Finance Authority

www.chfainfo.com