Buying a Home? Here’s What Lenders Look For: The 4 C’s of Credit

If you're planning to buy a home in Hudson, WI or anywhere around the Twin Cities, understanding how lenders evaluate mortgage applications can give you a big edge.

Let’s walk through the 4 C’s of Credit—what they are, why they matter, and how you can use them to your advantage.

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What Are the 4 C’s of Credit?

The 4 C’s are the main factors lenders use to determine your loan eligibility:

• Credit – Your history of managing debt

• Capacity – Your ability to make monthly mortgage payments

• Capital – Your available savings and assets

• Collateral – The property you're purchasing

Each one plays a role in helping lenders understand your overall financial picture.

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1. Credit: Your Debt History

Your credit tells lenders how responsible you’ve been with borrowing in the past. It’s one of the first things they’ll check.

What Lenders Review:

• Your credit score (FICO or VantageScore)

• On-time vs. late or missed payments

• How much of your available credit you're using

• Types of credit (cards, loans, etc.)

• Length of credit history

• Recent credit inquiries

Why It Matters:

• Higher credit = better interest rates

• Some loans require a minimum score (620+ for conventional loans)

• Impacts which loan types and terms you qualify for

Pro Tip:

“Keep your credit card balances below 30% of your limit,” says Joe Metzler, Senior Loan Officer at Cambria Mortgage.
“Even if you pay off your card every month, pay it down before the statement closes to report a lower balance.”

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2. Capacity: Can You Afford the Loan?

Capacity measures your ability to make the monthly mortgage payments. Lenders look closely at your Debt-to-Income (DTI) ratio to figure this out.

What Lenders Look At:

• Type and stability of your income

• Employment history (ideally 2+ years in the same field)

• Current monthly debts (credit cards, car loans, etc.)

• DTI ratio = Monthly debts ÷ Gross monthly income

Ideal DTI Ratios:

• Under 36% is preferred

• Some lenders go up to 43–50% with other strengths (great credit, strong savings, etc.)

Advice from a Pro:

“Don’t just focus on getting approved,” says Lisa Behm, SVP at First Federal Lakewood.
“Make sure your monthly payment leaves room for utilities, taxes, and surprise expenses. Go with a payment that fits your lifestyle.”

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3. Capital: Your Financial Cushion

Capital refers to the funds you have on hand for your down payment, closing costs, and cash reserves.

Lenders want to see that you're not relying solely on your paycheck—you’ve got some savings too.

Acceptable Capital Sources:

• Checking and savings accounts

• Retirement or investment accounts (401k, IRA, stocks)

• Gift funds (from family, with proper documentation)

• Down payment assistance programs or grants

Why It Matters:

• Proves you can handle upfront costs

• Strengthens your application if your credit or income is borderline

• Helps reduce the lender’s risk

Insight from the Field:

“Liquidity is king,” says Nate Condon of Walkner Condon Financial Advisors.
“Avoid moving large amounts of money between accounts before or during underwriting. Less movement means less paperwork—and faster approval.”

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4. Collateral: The Home You’re Buying

Collateral is the actual home you're purchasing—it secures the loan. If you default, this is what the lender can repossess.

What Lenders Evaluate:

• The home’s appraised value vs. your loan amount

• The condition of the property

• Location and future resale potential

Why It Matters:

• If the appraisal comes in low, you may need to pay more out of pocket or renegotiate

• FHA and VA loans have condition requirements (no peeling paint, safety issues, etc.)

• Property condition can delay—or even stop—closing

Local Note for Hudson Buyers:

Older homes near the river or in historic districts (like downtown Hudson) are beautiful, but they can pose appraisal challenges. Things like aging roofs, peeling paint, or older systems may need attention before financing is approved. A local agent can help spot issues early.

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FAQs About the 4 C’s of Credit

Which “C” is most important?

Most lenders consider capacity (your ability to pay the mortgage) the top priority.

Can I get a mortgage with a low credit score?

Yes—FHA and other government-backed loans offer flexibility. Strong income or a big down payment can help offset lower credit.

What’s a good DTI ratio?

Under 36% is ideal, but lenders may allow up to 50% with compensating factors.

How can I improve my 4 C’s?

• Credit: Pay on time, lower balances, monitor your credit report

• Capacity: Reduce debt or boost income

• Capital: Save more and limit big account transfers

• Collateral: Choose a home that fits your budget and loan type

Do I need cash reserves?

Not always—but having 2–6 months’ worth of mortgage payments saved can boost your chances and give you financial breathing room.

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Buying a Home in Hudson, WI or the Twin Cities? Let’s Talk.

The 4 C’s of credit are key to understanding what lenders need to see—and they can give you a real edge in today’s market.

Whether you're moving to Hudson, exploring homes for sale in the Twin Cities, or just getting started, my team is here to help you navigate every step.

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Start Your Home Search Today

📞 Call The Johnson Group at 651-333-7656
🌐 Browse listings at www.johnsonhomegroup.com
📍 Serving Hudson, WI and the greater Twin Cities metro area

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Written by Mark Johnson, REALTOR® and owner of The Johnson Group at Coldwell Banker Realty. With 20+ years of experience helping buyers and sellers in Hudson, WI and the Twin Cities, Mark brings expert real estate guidance with a local, personal touch.