The 5 C’s of Mortgage Underwriting – Capacity

If you are in the market to buy a home or soon will be, chances are you will need to obtain a mortgage. While there has been much talk about what it takes to qualify for a mortgage today, underwriters still look at the same things today as they did 10 or 20 years ago – the 5 C’s of mortgage underwriting. These 5 criteria are capacity, capital, credit, collateral, and compensating factors.


If a lender is going to give you hundreds of thousands of dollars, they are obviously going to want to make sure you have the ability to repay it. Capacity deals with your employment, income, and liabilities. Underwriters look not only at the amount of your income, but also the likelihood that it will continue. Have you had a stable work history? It is not uncommon for people to change employers, but if your employment history has gaps or your income has decreased, you will likely be asked to provide a satisfactory explanation.

Your income will factor into the evaluation as well. Even if you are a salaried employee your income calculation may not be as simple as dividing your salary by 12 to find your monthly income. If you write off certain things on your taxes, such as unreimbursed employment expenses, they may be deducted from the income used to qualify you. If you receive hourly pay, commission, or tips, or you are self-employed, your income will likely be averaged over a period of time; perhaps as much as two years. So, this means the income the underwriter must use to qualify you may be much different than how much you are actually earning right now.

Your liabilities come into play through a very important ratio used to determine how much of a housing payment you can afford to pay. This ratio is known as your Debt-to-Income (DTI) ratio. As it sounds, this is the total of the proposed housing payment and all your current monthly payments to creditors divided by your income. Debt payments include loans, lines-of-credit, spousal or child support payments and so on. Utilities, insurance, cell phones and such are not included in the calculation.

The maximum allowable DTI is different for different mortgage programs, but it is typically between 39% and 45%. So, just to use round numbers, if your income is $5,000 per month, and the maximum DTI is 45%, than the total of all of your monthly debt payments cannot exceed $2,250. If you have a car payment and a couple of credit cards totaling $500 per month, then your maximum total housing payment can be up to $1,750. Some programs will be more flexible than others and may allow payments to exceed the published maximum, but they will usually require one or more of the other 5 C’s to be particularly strong to offset the additional risk of a higher DTI.

Many prospective homebuyers will use a mortgage calculator they find online to determine how much they will qualify for. Unfortunately, these calculators rarely warn you that the biggest challenge is knowing what income to use. Fortunately, I can help you figure out what income will be used in your situation and how much of a mortgage payment you will qualify for. Feel free to contact me at your convenience and I will help you obtain the information you need to make informed choices.

Watch for the companion articles to this one:

The 5 C’s of Mortgage Underwriting – Capital
The 5 C’s of Mortgage Underwriting – Credit
The 5 C’s of Mortgage Underwriting – Collateral
The 5 C’s of Mortgage Underwriting – Compensating Factors