The 3 C’s of Mortgage Underwriting: What They Mean For You
If you’re buying a home in Hampton Roads, you’ll hear your lender talk about underwriting. That’s the step where a real person reviews your file to be sure the loan makes sense. Every program, whether it’s VA, FHA, or Conventional, comes back to three basics known as the “3 C’s.” Here’s what they are, why they matter, and how to put yourself in a strong position.
Capacity: Can you comfortably make the payment?
Capacity is your ability to repay the loan. Underwriters look at your monthly gross income and compare it to your recurring debts to calculate your debt-to-income ratio, or DTI. Debts include things like car payments, student loans, credit cards, and the new mortgage payment with taxes, insurance, and any HOA dues. They also review your assets such as checking and savings accounts, 401(k) and IRA statements, and sometimes want to see a small cushion called “reserves.”
Example:
If your gross income is $7,000 per month and your total debts with the new mortgage come to $2,800, your DTI is 40 percent.
How to strengthen Capacity
Pay down revolving balances to lower required monthly payments.
Avoid taking on new debt until after closing.
Gather clean documentation for income and assets so the underwriter can verify quickly.
If you’re VA, know that residual income guidelines may apply, which is another way the VA checks affordability for your family size and region.
Credit: How have you handled debt in the past?
Credit is a picture of your history with borrowing. Lenders pull a combined report from Equifax, Experian, and TransUnion. They look at your scores, late payments, credit utilization, length of credit history, and any red flags such as collections or recent bankruptcies.
Underwriters are asking a simple question: based on past behavior, are you likely to pay this loan on time?
How to strengthen Credit
Make on-time payments across the board. Even one recent 30-day late can hurt.
Keep credit card balances under 30 percent of each card’s limit, and lower is better.
Avoid opening new accounts or taking hard inquiries while you’re in the mortgage process.
Don’t close long-standing accounts right before applying. That can shorten your history and nudge scores down.
If something on your report is wrong, talk to your lender before disputing it. Active disputes can stall underwriting.
Collateral: Is the property worth the loan amount?
Collateral is the home itself. Your lender orders an appraisal to confirm the property’s market value and condition. From there, they calculate the loan-to-value ratio, or LTV, which compares your loan amount to the appraised value.
Quick example:
If the home appraises at $400,000 and your loan is $360,000, your LTV is 90 percent.
Different loan programs have different LTV limits and property standards.
VA loans require a VA appraisal and Minimum Property Requirements to ensure the home is safe, sound, and sanitary.
FHA loans have their own appraisal standards and mortgage insurance rules.
Conventional loans generally offer more flexibility on higher down payments and appraisal gap strategies.
How to strengthen Collateral
Work with a local REALTOR® who prices offers in line with recent comparable sales.
If the appraisal comes in low, ask your agent and lender about a reconsideration of value or options to bridge a small gap.
Be mindful that significant condition issues can trigger repairs before closing, especially on VA and FHA.
How the 3 C’s work together
Think of underwriting like a three-legged stool. A small weakness in one area can sometimes be balanced by strengths in the others. Maybe your DTI is a touch higher, but you have strong reserves and excellent credit. Or your credit is newer, but you have a solid down payment and stable income. The goal is a file that makes overall sense.
What to do next
Start with a solid pre-approval. A thorough pre-approval from a local lender helps you learn your DTI, understand your credit picture, and spot any issues early.
Keep your financial picture steady. No new debt, no big cash deposits without a paper trail, and no job changes without talking to your lender first.
Choose the right program. VA, FHA, and Conventional each handle the 3 C’s a bit differently. For example, VA can be very friendly to zero-down buyers while still focusing on residual income and property standards. FHA can help if your credit is healing. Conventional can be a great fit if you have a larger down payment and strong credit.
Underwriting isn’t meant to trip you up. It’s a structured way to confirm you can afford the payment, that your credit habits support the approval, and that the home is worth what you’re paying. If you’re buying in Hampton Roads, I’m here to walk you through each step, connect you with a trusted local lender, and help you present the cleanest, strongest file possible.
Have questions about your DTI, credit, or an upcoming appraisal? Reach out, and I’ll help you map out a plan before you ever write an offer.