What Are Lenders Looking For? Character!

When a lender is confronted with a borrower seeking financing they are looking for the 4 Cs of borrowing. In a post entitled “What is the Greatest Obstacle To Borrowing Money to Purchase a House?” I explained what the 4 Cs of borrowing are. In this post I intend to get much more specific as to what the lender is looking for in each of the 4 Cs: 1) Character, 2) Capacity, 3) Collateral, and 4) Credit.

When considering a borrower’s Character, lenders are looking primarily at a borrower’s employment history and the stability of income. Generally speaking, a lender wants to see that a borrower has been employed on a regular basis in the same line of work for at least 2 consecutive years. The lender will look closely at the following:

• Frequency of job changes – Changing jobs frequently may be a sign of instability.
• Changes in line of work – Changing lines of work may indicate instability and fluctuations in earnings history.
• Gaps in employment – Gaps in employment can occur for any number of reasons (i.e., loss of job, raising children, going back to school, injury, disability, etc…) Some gaps are explainable and may not necessarily prevent access to financing.
• 2^nd job – In order to consider this income a borrower should have a 2 year history of receiving income from a 2^nd job.
• Degree? – If a borrower has recently graduated and earned a degree, the time invested in obtaining the degree will meet or contribute to the 2 year employment requirement.

These are not hard and fast rules. Each situation will be considered on its own merits based on the lending guidelines that exist at the time a potential borrower applies for financing.

A lender wants to see that a borrower has a history of consistent and stable income. A borrower’s income calculation will be determined by the following:

• Gross income – The most stable form of income is an hourly rate of pay or a salary for a fixed number of hours worked. Lenders will credit a borrower with their pre-tax gross income for purposes of qualifying for a loan.
• Commission, bonus, overtime – For a lender to consider this type of income a borrower will have to demonstrate a 24 month history of receipt of such income. The lender will average the income over the most recent 24 month period, however, substantial fluctuations up or down in income will affect the income calculation.
• Self-employment income – C-corp, S-corp, Sole Proprietor – For a lender to consider income from a self-employed borrower the borrower will need a 24 month history of such income and the lender will average the “net income” over the most recent 24 month period and be looking for up or down trends in the amount of the income.
• Investment income – For a lender to consider income from interest, dividends, royalties, investment properties, etc… a borrower will have to demonstrate a 24 month history of receipt of such income. The lender will average the income over the most recent 24 month period, however, substantial fluctuations up or down in income will affect the income calculation.
• Spousal and/or Child Support – In order to consider this type of income, the income must be court ordered, must have at least 3 years continuance, have been received for at least 12 consecutive months, and receipt of such income must be documented by copies of canceled checks or bank statements showing a direct deposit of this income for the most recent 12 consecutive months.

This list of income types is meant to show the more common forms of income. There are other forms of income that lenders will consider and will be considered pursuant to the lending guidelines that exist at the time a potential borrow applies for financing.

If you’re interested in learning more about what it takes to purchase a home of your own, you’ll want to read other posts in the series, such as So, You Want to Buy a House?, The Power of Pre-Approval vs Prequalification, What is the Greatest Obstacle to Borrowing Money to Purchase a House?, What Are Lenders Looking For? Character!, What Are Lenders Looking For? Capacity!, What Are Lenders Looking For? Collateral!, What Are Lenders Looking For? Credit!, The Two Approvals, and more.

If you’re interested in learning more about what to consider before paying cash for any major capital purchase, download our FREE report entitled “Is Paying Cash Detrimental to Your Financial Health?” We also encourage you to contact us to schedule a time to talk about your specific circumstances.