THE 5 C’S OF CREDIT
These 5 factors are used to evaluate your mortgage application.
Lenders analyze five different factors when reviewing your mortgage application. They are often referred to as the 5 C’s of credit. When applied to your application the lender determines their risk level in providing you the funds and helps them in their decision to approve or decline your request.
1. CAPACITY
Can you afford the payments along with other living and credit expenses? The lender wants to know if you can handle the debt, if you’ll be able to repay the mortgage loan. Your income is reviewed and the lender will crunch some numbers to determine your Total Debt Service Ratio.
Check out Credit Reports GDS and TDS for details on how this is calculated.
2. CHARACTER
As past behaviours predict future tendencies, lenders put weight on your past payment responsibilities, how long you have been employed, and how long you have lived at your present address. The lender is looking for clients that show stability and reliability.
3. COLLATERAL
Is a pledge of property or other assets you are borrowing against. How marketable is the property you are financing? How much money are you putting down? The property provides a means of at least partial recovery if you were to default on the mortgage loan. If the lender finds a weakness in one of the C’s of credit but everything else is fine, they may ask for more money to be put down on the property so that their collateral position becomes stronger.
4. CREDIT
This is where you credit report is reviewed including your beacon or credit score.
Have you had difficulty meeting payments in the past? Are your credit trades at the credit limit or do you pay them in full each month? How long have you managed credit? All of these are factors in determining if you are likely to pay your mortgage payments as agreed.
5. CAPITAL
This is your net worth = assets minus liabilities. Are you in a positive position? Will you have access to any funds should you incur any unforeseen circumstances.
Not all the five C’s have to be perfect. Not many are. We will mitigate a weaker C’s with emphasis on a strong one if possible.
As an example, your Capital or net worth may be in a negative position, but this could be due to student loans and a new degree in your field of study. We will emphasis this to the lender.
Another example may be bruised credit when you were ill or going through a divorce. However, everything has been paid as agreed for the last year, you have good job stability (character) and are putting 10% down (collateral). These factors may mitigate the bruised credit.
Perhaps your capacity or affordability is right at the maximum ratios and you are fairly new on your job but your credit is A1. We would rationalize that you always prioritize your debt repayment each month.
There you have it – the 5 C’s that lenders analyze when reviewing a mortgage application. If you have any questions or concerns feel free to contact our office anytime, we’re here to help!
