Skip to main content

Have you heard of the four “C’s” of underwriting?

Some would consider this an old-school approach to lending, but even today’s modernized automated underwriting systems (“AUS”) take the same aspects of a loan application into consideration when weighing risk and determining loan approval. Your goal is to demonstrate more strengths in your loan application than weaknesses.

CHARACTER (a.k.a. credit)

Each lender and every loan program have their own minimum credit score requirements. Want to know more about credit? Read this article.

  • STRENGTHS: Excellent, Very Good credit
  • WEAKNESSES: Fair, Poor credit

COLLATERAL (a.k.a property)

The collateral, or property, needs to be in good condition with no health or safety concerns, or structural issues. If any of those exist, consider using a renovation loan.

When it comes to collateral, the greater your equity position, the better.

  • STRENGTH: Large down payment
  • WEAKNESS: Minimum required down

CAPACITY (to repay debt)

Your capacity to repay your new mortgage debt is measured by debt-to-income (“DTI”) ratios. In most cases, both your housing and total debt ratios will be considered. Your housing ratio is sometimes called the front-end ratio. Your total debt ratio is sometimes referred to as the back-end ratio.

To determine your housing ratio, divide your total monthly housing expenses (i.e., principal, interest, property taxes, homeowner’s insurance, flood or other insurances, homeowner’s/condo association dues) by your gross monthly income. To determine your total debt ratio, divide the sum of all monthly liability obligations (including housing expenses) by your gross monthly income. It sounds easy enough, but a lender is best qualified to determine your DTI ratios. Underwriters calculate gross monthly income in a variety of ways, depending on your income source(s), how you are paid, and your loan program. Underwriting may also calculate your minimum monthly payments differently than you would. For example, student loan debt may need to be factored into the equation, even if you are not required to make monthly payments at this time.

The housing ratio may not be a strong factor for conventional loans being sold to Fannie Mae ®, but the back-end ratio ideally would not exceed 36%. Whereas the front-end ratio would ideally be no higher than 28% for loans being sold to Freddie Mac ® and the back-end no higher than 36%.

For FHA loans, the ideal debt ratios would be 31% (front-end) and 43% (back-end), or 40% (front-end) and 50% (back-end) if compensating factors can be documented. Compensating factors are strengths in other areas of your loan application.

For USDA loans, the ideal debt ratios would be 29% (front-end) and 41% (back-end), though you may be able to go higher with compensating factors.

For VA loans, only the back-end ratio is considered. Ideally, it would not be more than 41%, but a higher ratio may be allowed if there are compensating factors.

  • STRENGTH: Debt ratios equal to or less than the limits mentioned above
  • WEAKNESS: Debt ratios that exceed the limits mentioned above

CAPITAL (a.k.a. cash reserves)

The amount of liquid assets (e.g., reserves) available to you after closing can help or hurt your creditworthiness. Think of these in terms of emergency funds that can help you to continue making your mortgage payment in the event of an unforeseen event such as job loss, an accident, an illness, or the death of a loved one.

  • STRENGTH: 3 months’ worth of total housing expenses or more
  • WEAKNESS: No reserves after closing


Jennifer Goldsby, NMLS #591226 | VP, Renovation Lending

Diamond Residential Mortgage Corporation NMLS #186805 | Equal Housing Opportunity

Disclaimer: The postings here reflect my personal opinion. They do not necessarily represent the opinions of Diamond Residential Mortgage Corporation and its management.