Many people have lost their homes in the past few years because they did not take the time to plan and prepare themselves. These people ended up losing their life savings. The reason? They failed to do the proper financial planning for their investment. There is a misconception that investments must come purely from one’s savings, but that is not entirely true. Sometimes investing means incurring healthy debts.

Not all debt is bad debt. There is also good debt, like what we used to buy assets, especially on real estate or businesses that will eventually appreciate the value of our money and increase our wealth. Whether we are talking about good debt or bad debt, we should treat all debt with a healthy outlook. But even healthy loans used to buy suitable investments can lead to financial problems if we do not have the proper knowledge to manage them.

Qualifying for a home loan is all about preparation. It starts with a good judgment on your budget plan to avoid getting into bad debt situations. Figure out how much you can afford on a mortgage payment by carefully reviewing your budget.

Generally, there are five Cs of credit that is used by lenders to gauge potential borrowers’ creditworthiness:

• The first C is character—reflected by the applicant’s credit history.

• The second C is capacity—the applicant’s debt-to-income ratio.

• The third C is capital—the amount of money an applicant has.

• The fourth C is collateral—an asset that can back or act as security for the loan.

• The fifth C is conditions—the loan’s purpose, the amount involved, and prevailing interest rates.

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Furthermore, there are five main areas lenders evaluate to decide for a home loan to further explain.

CREDIT HISTORY

A consumer’s credit history is a measure of their ability to repay debts and demonstrated responsibility in repaying debts. Having a good credit record will lead you to higher chances to be approved for a loan. Although some may qualify on some loans with bad credit but end up paying a much higher interest rate, which means a higher payment. So be careful before accepting high-cost loans.

DEBT-TO-INCOME RATION

Lenders look at how much money you make compared to your bills. They want to make sure that you make enough money to make all your monthly payments and still have some funds left. Having a low debt-to-income ratio lessens your personal risk when buying a property.

LIQUID ASSETS

These are the money you have readily available or assets quickly converted into cash, like checking or savings account. Lenders want to be sure that you have enough liquid assets or cash on hand to cover your payments for a few months. It is best to have at least six (6) months of payments set aside, in addition to the down payment, before buying real estate.

EQUITY

If you qualify for a loan, equity is defined as how much of a down payment you are putting. The higher the down payment, the easier time you will be qualified for a loan.

COLLATERAL

This is the asset you pledge in exchange for the loan. In the case of real estate, the property itself is the collateral of the loan. The lender actually owns the home until the mortgage gets paid off in full. If you happened to stop or fail to pay the loan, the lender would take back the property.

Now that you have an idea of the mortgage system, you may avoid paying too much for a home loan and have the right of money saved up for your first property purchased. This puts you in a financial situation where you can still enjoy your living situation with the least stress and anxiety.