Decoding The 5 C's Of Credit Appraisal
A majority of home loan buyers are at a loss when it comes to understanding the nitty-gritty of the mortgage process. The mantra is not to get intimidated by figures and documents, but to put in perspective this fact that the lender does not know you personally and is making the calculations based on information provided by you.
MakaaniQ tells you why credit appraisal is the building block in your home loan dream.
What is credit appraisal?
Credit appraisal is a process of appraising the credit worthiness of an applicant for a loan. To gauge the credibility of the borrower, his sources of income, age, experience, number of dependents, repayment capacity, past and existing loans, nature of employment and other assets are taken into account. Every bank or a lending institution has its own internal norms and procedures for underwriting the loan and scrutinising the applicant's details and credentials.
The five Cs of credit appraisal
Each of these Cs is used to ascertain the risk of default on a loan.
Character
Credit history report is the indicator used by lenders to judge the character of the mortgagee. The banks also use the qualitative factors such as the degree of honesty by cross-checking the facts presented by the borrower. For instance, if an applicant has hopped his job twice in a year, the reason for switching the job will be verified from his previous and present employers, to conclude if he has not concealed any information.
Capital
This is a critical criterion to ascertain the amount of loan the applicant is worthy of. Strong capital reflects the applicant's resilience to withstand ups and downs of the market lending rates. It builds the lender's faith in the applicant's repayment capacity. The applicant's equity must be good enough to not just meet the monthly obligations but the additional overheads as well.
Capacity
The capacity of the loan borrower is decided through his annual income. The Fixed Obligation to Income Ratio (FOIR) is one of the tools that helps link your potential for the home loan and the amount you need to set aside for your daily expenses and contingencies. Multiple existing obligations decrease your chances to get a new loan.
Conditions
Banks offer loans taking into account the prevailing market conditions, industry status, company, interest rate movements, inflation, price fluctuations among other things. Thus, strong and positive industry growth and economic conditions are indicators of the applicant's ability to generate revenue and repay the debt.
Collateral
A home loan is availed of against a security or collateral. If the borrower is unable to repay his debt, the lender depends on the strength and salability of the security. In case of a home loan, the property for which the loan is sought is a collateral. A vigorous study and examination of the collateral through legal and technical evaluation techniques is imperative to sanctioning a loan.
Here's a detailed credit appraisal process:
