What is the Greatest Obstacle to Borrowing Money to Purchase a House?

The 4 Cs of Borrowing

In a post entitled “The Power of Pre-Approval vs Prequalification” I explained that it is important to get prequalified before you begin your home search, and I further explained that if you are serious about purchasing a home of your own you should take it a step farther and get pre-approved.

There may be many reasons that you choose not to borrow money, but there are only two reasons to borrow money: 1) you need to, or 2) you choose to. Whether you borrow money because you need to or because you choose to, borrowing money will always be subject to the guidelines and eligibility requirements set by the lender. Typically, a borrower must overcome four key obstacles to be eligible to borrow against a house.

In the lending business we call these obstacles the 4 Cs; 1) Character, 2) Capacity, 3) Collateral, and 4) Credit. Each of the 4 Cs includes many different sub elements, but there is one key obstacle associated with each. Most people learn about these obstacles by running into them at full speed while in the middle of trying to borrow against the value of a house for a specific need.

The 4 Cs of Borrowing

Let’s explore the four obstacles and look at the key obstacle associated with each.

Obstacle 1 – Character

Your Character relates to your current and future ability and willingness to repay the debt. This includes your rental or mortgage history, your employment history, whether you’ve been involved in lawsuits, and whether you owe any back taxes.

The key obstacle to Character eligibility relates to the stability of your income and your ability to provide at least a two-year employment history in a particular profession or line of work. There are exceptions to this rule and they are made on a case-by-case basis, so feel free to contact me to find out if your specific situation qualifies for an exception.

Obstacle 2 – Capacity

Your Capacity relates to your income from employment and investments and whether you can afford to repay the debt. Maybe you’ve heard the old saying, “Cash is King.” Unless you can pay cash in full for a property, however, cash flow is king.

To determine whether you can afford to repay the debt, the lender will calculate the percentage of your gross monthly income that will be obligated to the total monthly mortgage payment and the percentage of your income that will be obligated to your total monthly debt payments.

The key obstacle to Capacity eligibility relates to a specific ratio of debt payments to your income. A common guideline ratio used by lenders is 36%/43%. The first number (36%) is the percentage of income available for mortgage repayment and includes property taxes, homeowners insurance, mortgage insurance, and any HOA dues, if applicable. The second number (43%) is the percentage of income available for your total debt payments, which includes the total mortgage payment, any auto loan payments, installment loan payments, credit card payments, child support payments, etc… Payments such as utilities, auto fuel, auto insurance, mobile phones, and the like are not considered in this calculation.

Obstacle 3 – Collateral

Your Collateral relates to the total value of your financial assets. In a purchase transaction, the lender is primarily concerned with the amount of your down payment – the amount of money you invest in the house at the time you make the purchase. In a refinance transaction your collateral includes the amount of your equity, which is the difference between what your home is worth at any given time and the total of any outstanding mortgages at that time.

Lenders also consider Collateral outside the house, such as money you have available in your investments, qualified and non-qualified retirement accounts, checking and savings accounts, insurance cash value, and other liquid assets.

The Collateral inside the house protects the lender first, while the Collateral outside the house protects you first.

The key obstacle to Collateral is the size and source of your down payment. The lender is concerned about whether or not you have any equity in the event you cannot or will not repay the loan.

Obstacle 4 – Credit


Your Credit is the greatest indicator of your willingness to repay in a timely manner. Your willingness to repay mortgage debt on time is the lender’s greatest single concern in approving you for a loan. The higher your credit score, the lower the statistical risk to the lender of payment default or delayed payment.

Willingness to repay is even more important than the ability to repay, but both impact your credit score. These days, it is more important than ever to monitor your credit and your credit score on a regular basis if you want to borrow at the most beneficial terms.

The key obstacle to Credit is a credit profile and credit score that meets the minimum requirements of the lender.

Lenders look for balance among the 4 Cs. Having plenty of Collateral can help offset a lack of Character and Capacity. High Character and Capacity ratings can help offset a lack of Collateral inside the house.

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?, 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.

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