Money IQ: The 5 C’s of Mortgage Banking

Money IQ

The 5 C’s of Mortgage Banking

The five most important items when evaluating a mortgage loan application are described below: Characteristics, Capacity, Cash to Close, Character (credit) and Collateral.

Explaining the 5C’s in an understandable method is the most important tool to ensure a great customer experience.  


In mortgage lending characteristics are described as follows. It is the intent on every loan application to be able to describe the following.

1. What type of product is the customer applying for and knowing all of the requirements needed to get the loan product requested approved. This requires knowledge of FNMA’s guidelines but includes your lender’s loan policy as well. Lenders need to know if one W-2, one paystub, tax returns, bank statements, retirement funds etc. are needed.

2. Knowing how and when is the best time to communicate with the customer. This could be via text, via fax, e-mail or phone. It is the Lender’s job to know how to communicate with each and every customer.

3. Lenders should be able to express the expectations and desires of the customer when addressing the loan file and maintain good record keeping.

4. The goal is that anyone who works on the file and reads this information knows how to proceed with the borrowers and the loan product being requested.


The capacity is calculated once the lender completes the credit counseling in the initial loan process.  Lenders should be able to determine income in many different ways.  The Debt to Income (dti) is one calculation.

Step 1: Example: If a customer provides a paycheck stub with no W-2 at the time of the application here are techniques for the calculations.

If a Borrower gets paid every two weeks this means there are 26 pay periods during the year. If you divide the gross amount on the stub by 2 then multiply by 4.3 you will get the gross monthly income.

Gross Income every two weeks: $2,652.52 divided by 2= $1,326.26 X 4.333=$5,746.68

If a borrower gets paid weekly, then take the amount paid divide by 40 hours then multiply X 2080 hours, and divide by 12. (There is 2,080 working hours annually)

$1,326.26 divided by 40= $33.16 per hour X 2,080=$68,965.53 divided by 12 months=$5,747.13.

Same borrower only brings in one W-2 with an annual income of $68,965.53 divide by 12= $5,747.13

Step two: The lender completed the following after pulling credit and considering the proposed loan terms.

Example: Income used is $5,747.13 per month, current monthly liabilities is $750.00. Loan requested is $303,960 @ 3.625% for 30 years with a P&I payment thus a proposed monthly payments of $2,586.21 resulting in 45 percent debt to income ratio. This calculation should be entered into notes.

Character (Credit)

In mortgage lending the credit evaluation is fairly straight forward. Lenders should be concerned with the following items when reviewing a borrower’s credit file.

1. FICO scores are the calculation completed by a credit risk engine. The score considered is generally the middle score for the primary borrower. Any score under 620 will need a lot of work to increase the score; most lending institutions do not currently have a product for this loan request.

2. Review the actual file for any delinquent trade lines, disputes or slow payments in the last 24 months. It is important to address any of the listed items with the borrower. The mortgage loan underwriter will want this information and explanation in writing from the borrower.

3. Address any inquiries with the borrower, and have them write out an explanation for inquiries within the last 120 days

4. Make your notes in the file and move on to Cash to Close.

Cash to Close

In mortgage lending this is the most overlooked item in the loan process. If the bottom line says the borrower needs $25,000 cash to close, the lender should make sure to review current bank statements and asset section to make sure the borrower has the required funds. This is the time to make the adjustment and request additional documentation from the borrower.


This is the security (aka real property) that will secure the lien position of the lender. While there are a few different types of purchases and re-finances loan officers need to make sure to order the proper type of appraisal. This is determined while loan officer are compiling the characteristics of the loan profile.

Example: On an Investment property many loan products require a schedule of rents.

Editor’s note: Robert Ortega has been in the mortgage industry since 1986. He brought his expertise to LANB in 2012.

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