PROPERTY IS POWER! The Three Cs of Credit: Unlocking the mortgage approval code

by Anthony Kellum

Securing a mortgage is often the pivotal step towards fulfilling the dream of homeownership. Whether you are a first-time homebuyer or looking to refinance your existing home, the path to mortgage approval revolves around the three Cs of credit: Capacity, Character, and Collateral. These three characteristics serve as a blueprint for lenders to assess the riskiness of lending to a potential borrower, ultimately determining whether to approve or deny a loan request.

Capacity: The Financial Backbone

Capacity, the first of the three Cs, delves into your financial capability to take on and manage debt. Lenders evaluate your capacity by examining your income, expenses, and existing debts. Here are some key factors that influence your capacity assessment:

  1. Income Stability:

Lenders want to ensure that you have a stable and reliable source of income to meet your mortgage obligations. A consistent employment history and a regular income stream are seen as positive indicators.

  1. Debt-to-Income Ratio:

The debt-to-income ratio (DTI) is a critical metric that compares your monthly debt payments to your monthly income. Lenders typically prefer a DTI below 43 percent, as it indicates your ability to comfortably manage new debt, but ultimately, the lower that number is, the better your chances are.

  1. Employment History:

A steady employment history demonstrates your capacity to maintain a stable income. Frequent job changes or gaps in employment may raise concerns for lenders.

Character: Trustworthiness and Responsibility

Character assesses your trustworthiness and responsibility when it comes to managing credit and debt. While it’s challenging to quantify character, lenders rely on several factors to make this assessment:

  1. Credit Score:

Your credit score, based on your credit report, serves as a numerical representation of your credit history. A higher credit score signifies responsible credit usage and timely payments.

  1. Payment History:

Lenders scrutinize your payment history to identify any past delinquencies, late payments, or defaults on loans and credit cards. Consistent, on-time payments reflect positively on your character.

  1. Credit History:

A longer and well-managed credit history can demonstrate your ability to handle financial responsibilities effectively. Lenders often prefer borrowers with an established credit history.

Collateral: The Safety Net

Collateral represents the assets or property used to secure the loan. In the context of a mortgage, the property you intend to purchase serves as collateral. Lenders use collateral as a safeguard in case the borrower defaults on the loan. Key considerations for collateral assessment include:

  1. Appraisal:

Lenders require a professional appraisal of the property to determine its current market value. The appraisal helps ensure that the property’s value aligns with the loan amount.

  1. Loan-to-Value Ratio (LTV):

The LTV ratio compares the loan amount to the property’s appraised value. A lower LTV ratio indicates less risk for the lender, as it means the borrower is investing a significant amount of their own funds into the property.

  1. Property Condition:

The property’s condition is essential. Lenders want to ensure that the collateral remains valuable and can be sold to recover the loan amount if necessary.

The Decision-Making Process

After evaluating capacity, character, and collateral, lenders determine the level of risk associated with lending to an individual. This risk assessment informs their decision to approve or deny a mortgage application:


If the borrower’s capacity is sufficient, their character reflects responsible financial behavior, and the collateral meets the lender’s criteria, the application is likely to be approved. Borrowers with lower risk profiles often receive more favorable loan terms, such as lower interest rates.


Conversely, if a borrower’s capacity is questionable, their character raises concerns about creditworthiness, or the collateral falls short of requirements, the lender may deny the loan application. In some cases, borrowers may be asked to address specific issues before reapplying.


The three Cs of credit Capacity, Character, and Collateral act as the foundation for mortgage approval decisions. By thoroughly assessing these characteristics, lenders gauge the riskiness of lending to an individual and make informed choices about whether to approve or deny a loan request. Aspiring homeowners can improve their chances of mortgage approval by maintaining financial stability, demonstrating responsible credit behavior, and ensuring the collateral meets lender expectations. Understanding and aligning with the three C’s of credit can help potential borrowers unlock the doors to homeownership and secure their place in living the American Dream.


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