5 C's of Credit; What lender's look at when deciding on your mortgage request

Monday Oct 30th, 2017

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I have got a lot of question on what the banks and other lending institutions consider under the bank act when making a decision on a mortgage application. A lot of factors are considered here but when a home buyer is looking to have the best chances of getting the home of their dreams the financing part is the next biggest thing besides the home and the location. This is why knowing the basics behind what lenders are looking for will help you better understand the process and what the bank considers when making their decision. 

What are the Five C’s Of Credit that lenders look at:

Though credit is one factor considered when getting a mortgage there are other factors considered. It is not just a score that rates your ability to make payments on time. There is a method used by lenders to determine a borrower’s credit worthiness that weighs five different categories to gauge the possibility of default: capacity, capital, collateral, credit and character.

Capital

Capital in plain terms is the amount you have saved as a down payment – an indication of how invested you are in purchasing a property. You capital will show to potential lenders your ability to save and accumulate assets. Lenders use a loan to value (LTV) measurement to determine the amount of capital you need as a down payment as well as to decide on the rates and terms of your mortgage. In the field of credit risk the lower the LTV the lower the risk for the lender.

Capacity

This port of the 5 C's of credit it is capacity to be the most critical of the five categories; it refers to the borrower’s capacity to repay a loan. The lender’s main concern is how you intend to repay your loan and will consider your income (from all sources) against your monthly expenses. This is represented as TDS Total Debt Service Ratio and GDS Gross Debt Service Ratio.

Collateral

When you consider collateral this is for the lender the security of the mortgage being lent out. The property, its value, location and characteristics are one form of security; the lender wants to know that a property is marketable and can be resold if necessary. Another aspect of collateral is also a person or persons who can guarantee the loan or other wise known as co-signers.

Credit

Now when you think about credit and the applicant's current and past payment history this shows the lender a summary of your repayment history over a period of time. The lender needs to feel comfortable in an applicants potential to make payments; by examining your payment history with existing credit relationships they can predict your predisposition to pay. This is the reason it is your credit score is the most dependable measurement a lender can use to determine your likelihood of payment.

Character

Then there is Character; this is where the lenders will see you s the borrower are trustworthy and will meet your obligations to them. The factors lenders consider are length of employment, your actions taken to save and use credit responsibly to establish your character and determine whether you are a borrower that they can trust with their loan.

This is why it is important to take the advice of your mortgage professional to sit down with you and go over the best mortgage based on your wants and needs. Armed with the right information will ensure when you do apply for the mortgage you will have the lenders offer you their best rate and terms.


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