Module 1: The Four Cs of Underwriting
When verifying the documentation on a mortgage loan file, loan originators, loan officer assistants, processors and underwriters keep in mind what is known as the four C’s of underwriting. They are the four aspects of a loan that must be reviewed to ensure creditworthiness.
The four C's of underwriting are:
Credit: Credit refers to the borrower's ability to repay a loan. Lenders will look at the borrower's credit score and credit history to assess their creditworthiness.
Capacity: This refers to the borrower's ability to repay the loan. Lenders will look at the borrower's income, debt-to-income ratio, and employment history to assess their capacity.
Capital: This refers to the borrower's net worth. Lenders will look at the borrower's assets, liabilities, and debts to assess their capital.
Collateral: This refers to assets that the borrower can pledge to the lender in the event of default. The collateral is used to secure the loan, which means that the lender can seize the collateral if the borrower defaults on the loan.
The weight that each C carries will vary depending on the type of loan and the lender's risk tolerance. For example, a lender that is more risk-averse may place more emphasis on credit and collateral, while a lender that is more willing to take on risk may place more emphasis on capacity and capital.