FIVE PRINCIPALS OF CREDIT

In analyzing a mortgage request, all mortgage lenders focus on the "Five C's of credit (capacity, capital, character, condition and collateral) as they apply to a residential borrower. We will analyze each of these in detail and describe how they relate to a mortgage applicant. [If a Alternate Documentation program has been chosen, the income verification information contained in this section would not apply.]

CAPACITY
In analyzing a consumer's capacity for a mortgage request, lenders look at the components of the debt-to-income ratio to ascertain an individual's ability, both now and in the future, to repay a mortgage obligation based upon his/her cash flow. Income Analysis (for Rate Saver loans only). Income must be reviewed for stability based on the number of years worked, as well as economic conditions for a particular profession to determine the future stability of said income. We analyze the borrower's present employment situation by looking at the number of years employed and the type of employment. All salaried borrowers are required to submit a current year-to-date pay stub in conjunction with a most recent W2 and/or tax return. If the borrower is self-employed, the latest two years complete, signed and dated 1040's are required as well as the latest applicable two years of complete, signed and dated business tax returns and complete interim financial statements. For sole proprietorships or owners of closely held businesses, it is important to analyze the business itself and to ascertain whether or not the owner(s) are withdrawing excess income from a company, which may have an adverse effect on the business' performance and ongoing viability. Income from Other Sources This includes: -Disability -Public Assistance -Royalties -Part-time Income -Pensions -Separate Maintenance* -Alimony* -Other Retirement Income -Child Support* -Annuities These should all be included in total income, provided that all sources are verified (if applicable). Acceptance of verification should be based on continuity and stability in all cases. *Alimony, child support or separate maintenance income need not be revealed if the borrower or co-borrower does not choose to have it considered as a basis for repaying this loan. It is imperative to look at the borrower and to substantiate the borrower's income by means of the verifications described above, whether he/she is a salaried employee or self-employed. It is critical to evaluate an individual's employment background and utilize this knowledge to build a comfort level that the individual has the ability to continue at the same or higher income level. More important is that an individual in a fairly new self-employed venture has the background and financial resources required to make that venture a success and withstand a downturn in the economy.

Telephone: (800) 262-7866

5 Principles of Credit

CAPITAL
Capital, in relationship to a residential mortgage borrower, is defined as "indicating the ability of financial control as well as the ability to build up liquidity and net worth." We analyze a consumer for his/her net worth and liquidity. Net Worth: Net worth is a measure of a person's assets minus liabilities. Liquidity: The ability to accumulate assets, that are readily convertible into cash, is known as liquidity. This is a good indication of a person's planning capability and/or the wherewithal to build up funds for unforeseen circumstances.

CHARACTER
When lenders underwrite a mortgage request, analysis of the character of an individual is divided into two areas; 1) the individual's personal credit history, and 2) the individual's employment stability. The most important aspect in analyzing an individual's credit character is the evaluation of his/her credit history. The credit history gives a lender the full picture of a borrower's past and present performance. This will also establish a clear picture of an individual's willingness to repay. It is crucial in underwriting that you focus not only on the ability to pay, as we described in analysis of income, but also upon the willingness to repay. Many borrowers prove their ability to repay, but do not possess the willingness. Isolated incidents of slow payment should be analyzed and fully explained. Recent inquiries for credit should be reviewed and it should be determined whether or not the individual may be a frequent seeker of credit. As long as explanations of delinquencies and derogatories are documented, and the reasons are legitimate, these explanations may be accepted. Another aspect of character is the individual's overall stability in relationship to employment. A pattern of delinquent payments is not acceptable. An individual should strive to create stability by a solid employment picture which indicates longevity in a certain profession for career growth, but not necessarily with the same employer. An individual who changes employment for advancement opportunities, as well as the individuals who stay with an employer for a long period of time, exhibit quality character. A high credit risk is an individual who constantly changes professions and never seems to stabilize in a particular career. Great care should be taken in analyzing these types of situations.

CONDITION
Condition relates primarily to the business environment in which a borrower operates. When underwriting a loan be aware of economic conditions and their effect on growth potential and continued stable performance.

COLLATERAL
After we establish that t an individual is a sound credit risk by analyzing the borrowers capital, capacity, character and condition, we must look to the final principle of credit, that being collateral. The Appraisal Report will be the final factor in our overall credit analysis and we will review this in great detail in the Appraisal section. Telephone: (800) 262-7866 5 Principles of Credit