Credit or Character: which is more important in underwriting?
I am sure everyone who has ever been involved in banking is familiar with the 3 Cs of lending, but what about the 4th C. Many wonder how a private lender underwrites a loan with the 3 cs of lending as a guideline. As a private lender, I think the most important factor is what I will call the 4th C of lending.
Before beginning it is important to define what the 3 Cs of lending are:
- Credit: can the borrower display a history of credit worthiness
- Capacity can the borrower support the repayment of the loan
- Collateral does the borrower’s collateral have enough value to support the loan at the appropriate loan to value
As we all have experienced, traditional lenders have rigid guidelines on which loans are approved based on the above items. For example a traditional lender has a credit score minimum, debt to income ratio (capacity), and an LTV minimum typically based on an MAI appraisal. There is little if any variation in these criteria. In a banks eyes many times a loan either fits the box or is unable to be funded. In today’s lending environment many loans are falling into the unfunded category
A private lender on the other hand typically has a much greater ability to fund a transaction that does not fit traditional guidelines. I’m typically asked, how does a private lender underwrite a loan by not following the same guidelines as a traditional bank? Private lenders, like myself, actually do utilize the three Cs + 1, but interpret this information radically different than a traditional lender. (Read the full article to discover the 4th C of lending)
Although the three Cs are critically important for both private and traditional lenders, they can be interpreted very differently. A private lender also heavily emphasizes the softer side of lending, character. I have found that behind every situation there is a story that needs to be understood by the lender. Ultimately a credit score does not tell the full story; I consider the 4th C, to be a much stronger indicator of loan success than credit.
Learn more about lenders that emphasize character over a credit score: More about Fairview Lending
Fill out a one page loan application that is not credit score drive: Loan Application
Read the entire article: Credit or Character which is more important to the lender
