Most lenders will lean on the “Three Cs” of Credit – Collateral, Capacity, and Character as the pillars of underwriting a loan, but it’s become clear to me over the years that the three most important things in loan underwriting are truly Ability, Ability, and Ability. In other words, does the borrower have the resources (income and assets) available to them to pay the loan back. It’s true that Ability is really one of the “Cs”, “Capacity”, but it has been my experience that if a lender wants a loan to perform, the loan will not normally perform if ability is not addressed. I have seen loans in the past perform where Collateral and Character where not addressed, but loans will not typically perform, regardless of whether the other two “Cs” are addressed. Many hard money lenders only seek to focus on the Collateral aspect, but they are perfectly fine if the loan does not perform and they can get the property back and actually come out ahead by liquidating the collateral, but Ability, or Capacity, is the key.
