Our 5 Cs Loan Evaluation Model

At Mortgage Investors Network we take financial analysis output very seriously.  We know that is is extremely important to offer only the best quality loans to our network of investors.

We also know that often times using straight financial numbers to analyze mortgage loans doesn’t truly capture the opportunities at hand.  In many cases, there are circumstances that make a big difference as to whether or not a loan would make a good investment. 

This is why, unlike a traditional mortgage loan programs, we evaluate our potential loans using our “5 C’s Credit Evaluation Model.” The model weighs five important characteristics of the borrower to gauge the creditworthiness and conditions of the loan. 

Collateral is an asset that can back or act as security for the loan.

The collateral is a form of security that guarantees repayment on the loan we’re providing. We require that the collateral has sufficient liquidation value in the rare case of default. When we are looking at a borrowers collateral, some of the key areas we are focusing on are:

  • Valuation of the property
    • We require a certified professional appraisal of all collateral. The appraisal, along with our own experience within the marketplace, helps us to better understand the location, marketability and other aspects of the collateral. 
  • Loan to Value (LTV)
    • At Mortgage Investors Network the amount of money we loan to a borrower cannot exceed a 55% Loan to Value (LTV) ratio. 
    • For example, If a property has a value of $100,000 the maximum loan amount we will provide (if approved) is $55,000. 

There are times when the initial evaluation does not meet our criteria but we are experts at finding ways to rework the deal to enable the borrower to meet the 55% or less LTV. Somtimes we do this by then look at other assets or savings that can be claimed if a borrower can not make their payments or we find alternative source of repayment. 

Capital analyzes the financial strength of the borrower and how much of the borrowers own resources are in the project.

There are a variety of areas we look at when assessing this category. Ultimately, it comes down to two main areas, financial strength of the borrower and how much of the borrowers own resources are in the project.

  • Financial strength/wealth position
    • This can be determined in part by understanding the borrowers net worth. During the information gathering stages we obtain all assets and liabilities of the borrower, in essence their Balance Sheet. Obviously the greater the strength the higher degree of certainty the borrower has in repaying the debt.
  • Personal investment in the project
    • How much the borrower has personally put into the project shows us how much the borrower believes in the project which helps us determine if we should too.
    • How much capital/risk is the borrower willing to take on to obtain the loan
    • How much money does the borrower have in the project
    • Skin in the game or down payment

Capacity focuses on income and financial obligations to ascertain the ability of a borrower to pay their monthly debt consistently and on time.

Capacity to pay is another key factor in evaluating our loans. In this category we really focuses in on income and other financial obligations to ascertain the ability and how a borrower will pay their monthly debt. Some of the key statistic we look at are:

  • Debt-to-Income Ratio
    • Lower than 43% means a better evaluation score
  • Loan to Net Worth ratio – The lower the percent the better the evaluation score 
  • Continuous Years of Employment
  • Demonstrated responsibility and integrity of borrowers actions to pay

Character is at the core of our evaluation and is the understanding of the borrowers integrity, trustworthiness and honesty.

Character is a primary factor for any potential borrower, at the core of our evaluation is the understanding of the borrowers integrity, trustworthiness and honesty. At Mortgage Investors Network this is the only category (when negative) that can override all the other categories and immediately reject a potential loan. Providing us with accurate and timely information in the evaluation process is one area we look at in helping us determine a borrowers score in the character category. Some of the the additional statistics we evaluate are:

  • Applicants Credit Score
    • FICO scores range from 300-850 and are designed to help lenders predict the likelihood that an applicant will be 90 or more days late on any reported credit obligations within the next 24 months.
    • Typically we are looking for a score that is 500 or higher, obviously the higher the credit score the greater the score number they will obtain within our evaluation model.
  • Applicant’s credit history
    • How often they pay their debts
    • How big the debts have been
  • Personal credit
  • Tax history
  • Typically we won’t ask for this unless we need to verify some other numbers
  • Personal and business reputation of the borrower
  • Track record with other creditors and suppliers
    • Business tendencies
      • Willingness to pay is as important as ability to pay

Circumstances are when we look at the whole picture and use our business sense to help us determine what we might of missed or what should be added to the evaluation process.

The circumstances or conditions category evaluates:

  • Purpose of the loan
  • How the borrower intends to use the money
  • The amount involved
  • Prevailing interest rates
  • Principle
  • Market conditions
  • The financial conditions that exist at the time of the loan
  • The state of the overall economic environment, specifically the factors that might affect your industry and business
  • The competition for the borrowers business
  • Sensitivity of the borrowers cash flow and other capacity measures to changes in the economy

This is also where we step back and look at the whole picture. We rely on our experience and business sense to determine if we need additional information.  

We take the financial analysis output very seriously, but it’s our willingness to look at the big picture, to understand the business sense of the project and use our experience to provide creative options to help close loans that sets us apart from other loan companies.

Interested in learning more, contact our office for additional information.