LENDING – The Four C’s

The Four C’s

When a person is seeking finance, they make an application through a mortgage broker or a lender directly. These applications are ‘assessed’ utilising various criteria. Assessors will be looking for documented evidence of the following:

CAPACITY

• This is the ability of a borrower to repay the loan. Servicability of a loan will be looked at using the lender’s own calculations.

CHARACTER

• Various aspects relating to the borrower’s character will be determined from the supporting documentation provided.

CREDIT

• The borrower’s credit history will be looked at. Any defaults or arrears will be identified to determine suitability of the borrower.

COLLATERAL

• Whether the borrower has the required security to support the loan will be determined. Most often, this is done by valuing the property the borrower is looking to purchase or refinance.

What does it all mean?

The Four C’s are the basis of loan assessment. How a borrower appears in the face of each ‘C’ will determine their suitability as a borrower for a particular product.

If a borrower cannot prove CAPACITY, they are a candidate for a ‘LOW DOC’ or ‘NO DOC’ loan. For a ‘LOW DOC’ loan, this could be as a result of many reasons including not having tax returns completed, non-taxable cash income or whatever other reason why income cannot be documented.

For a ‘NO DOC’ (often referred to as an ‘ASSET LEND’) loan, the borrower may just want to keep their personal financial details private and have a lot of security available to support their borrowings.

Risk is considered to increase with less documentation being provided so these products are priced accordingly or guidelines are implemented to keep the borrowing at lower levels than are permitted for fully documented loans.

‘LOW DOC’ loans in recent times have been priced at the same level as fully documented loans but the maximum you can borrow against a security is usually restricted to 80%. Fully documented loans can go as high as 106% against a single security.

‘NO DOC’ loans are still priced a little bit higher than fully documented loans and are usually restricted to around 65% of the security value.

CHARACTER is a difficult one to determine for lenders and borrowers are given the benefit of the doubt unless something blatantly obvious is discovered – for example, you appear on the front page of the Sydney Morning Herald convicted of fraud and the assessor sees the story.

CREDIT is quickly determined by a credit history enquiry through Baycorp Advantage – CRAA (or other credit reporting agencies) and looking at repayment history in the supporting documents. Smaller defaults or arrears are often ignored but if anything the lender considers substantial appears, they will either refuse the loan or price the product appropriately. These loans are known as ‘CREDIT IMPAIRED’ loans. Even a borrower with bankruptcy on their credit history can borrow money under specific circumstances (eg: they pay out the bankruptcy at or before settlement) but they will be paying for it through higher interest rates and fees.

COLLATERAL is determined by looking at the security property value and suitability to meet the lenders requirements for the product being offered.

‘LOW DOC’, ‘NO DOC’ and ‘CREDIT IMPAIRED’ lending is considered under the category ‘NON-CONFORMING’. These loans are growing rapidly in popularity as borrowers are no longer restricted as to their ability to borrow money except by the interest rate and cost of the products they will be offered. It is no longer a question of whether I can get a loan but a question of ‘HOW MUCH WILL IT COST ME TO DO WHAT I WANT TO DO?’.

NOTE:
Stating income levels to obtain a loan approval at levels that are not representative of your earnings are dangerous and illegal. You may be flagged for audit by the Australian Taxation Office (ATO) when the Land Titles Office (LTO) registers your interest in a property. The ATO and the LTO (as well as many other Government departments) are linked by computer. There is currently a ‘crack-down’ on some of these types of loans so proceeding cautiously is advised. No-one should put themselves in a position where they may be caught for tax evasion or fraud!

Robert Bou-Hamdan
Mortgage Adviser

0414 347 771
[email protected]
http://www.mortgagepackaging.com.au

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Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty Ltd