In mortgage lending, what does 'capacity' primarily refer to?

In the context of mortgage lending, 'capacity' primarily refers to the borrower's ability to make payments. This concept assesses whether the borrower has enough income and financial resources to repay the mortgage over time. Lenders evaluate capacity by examining various factors, such as the borrower’s income, existing debt obligations, employment stability, and financial history. By determining capacity, lenders can gauge the risk of default and ensure that borrowers are not taking on more debt than they can handle, which is crucial for responsible lending practices.

While credit score, collateral, and the amount of the loan are important factors in the mortgage approval process, they do not directly define a borrower's capacity to meet payment obligations. Credit score reflects creditworthiness, collateral refers to assets backing the loan, and the loan amount indicates the size of the mortgage; however, none of these metrics alone provide insight into the borrower's overall financial ability to sustain regular payments throughout the mortgage term.