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The 3 C’s of credit every first-time homebuyer should know

A first-time homebuyer can easily get lost in the weeds when applying for a home loan, which is why we recommend starting with the basics: the three C’s of credit.

Lenders may use all or some of these characteristics to determine your creditworthiness before approving a loan.

The 3 C’s of credit

1. Character

2. Capacity

3. Capital


“Character is often measured by your credit.”
Benjamin Keys, Assistant Professor of Real Estate, Wharton School of the University of Pennsylvania

Your credit reports contain information about your credit accounts and transactions. A lender can look at your credit reports to learn how often you make payments on time and how many accounts (credit cards, auto loans, student loans, etc.) you have in good standing. A credit score is a three-digit number that reflects the information in the corresponding credit report. Keep in mind that there are multiple providers, each of which may use different scoring models which generate different scores. Check your credit reports and verify that all the information is accurate and current.


Your capacity is based on your financial ability to repay the mortgage. “Capacity is usually measured by income and employment,” says Keys. Lenders may review your most recent federal tax return, along with several pay stubs and a few months of bank statements, to verify your income. The other factor they’ll likely assess in relation to your income and employment is your stability. Part of that relates to how long you’ve had your job, says Barry Zigas, director of housing policy for the Consumer Federation of America. And lastly, your Debt to Income (DTI) ratio is calculated. If your DTI ratio is higher than you’d like or higher than the bank allows, try to lower it. Try to pay down or pay off some or all of your debt.


Capital is the money you have left after you buy a home, along with any investments, properties and other assets you could liquidate fairly quickly. Even though a home is likely the largest purchase you’ll ever make, lenders generally don’t want you to clean out your bank accounts to buy a home. “If you don’t have cash in the bank after you’ve bought a house, you could be vulnerable,” explains Zigas. Oftentimes, mortgage lenders will frame your savings in terms of a certain number of mortgage payments you have in the bank, says Keys. But the specific number they like to see varies. Recognize that a down payment is only part of buying a home. It’s smart to save as much money as you can so you can comfortably make future mortgage payments and cope with the regular costs of homeownership, like repairs and taxes.

Bottom line

Ultimately, the three C’s of credit boil down to a fourth C: confidence. A lender is looking for the confidence “that you can pay your debt,” says Zigas.

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