In the context of the 4 Cs of lending, what does capacity refer to?

Capacity refers to the borrower's ability to make the monthly payment on a loan, which is a critical aspect of the lending process. Lenders evaluate capacity through the borrower's income, employment stability, and current debt obligations. This assessment determines whether the borrower generates enough income to consistently meet their mortgage payments along with other financial commitments.

Understanding capacity is vital because even if a borrower has a good credit score or ample collateral, it is ultimately their income and financial behavior that provide assurance to lenders that the loan will be repaid. This aspect helps lenders manage risk effectively, ensuring that borrowers are not overextended beyond their financial means, which can lead to defaults. Thus, a clear understanding of the borrower's financial situation and repayment ability is essential in making sound lending decisions.