BREAKING DOWN THE 5 C’S OF CREDIT
While most people have heard of the three R’s of the environment – reduce, reuse, recycle – many aren’t aware of the five C’s of credit – capacity, character, collateral, credit and capital. While your credit score plays a big role in whether your deal is approved, there are other factors that are just as important.
Lenders assess your credit risk based on a number of factors, including credit/payment history, income, and overall financial situation. Here is some additional information to help explain these factors, also known as the “5 C’s”, to help you better understand what lenders look for:
Can you afford the payments along with other living and credit expenses? We need to know if you can handle the debt and if you’ll be able to repay the mortgage loan amount as agreed. Your income is reviewed and we will crunch some numbers to determine your gross debt service (GDS), the percentage of a borrower’s gross income used to cover monthly payments associated with housing costs including utilities, mortgage payments, taxes, condominium fees, and pad fees when applicable, and total debt service (TDS) ratios, your TDS ratio is the percentage of your income needed to cover all of your debts including all of your GDS costs. Remember, we are able to use income from things like alimony, child support, disability income, and some lenders even let us include child tax benefits.
As past behaviors predict future tendencies, lenders put weight on past payment responsibilities, how long you have been employed, and how long you have lived at your present address. Lenders look for clients that show stability and reliability. We need your whole story (divorce, health, etc), to allow us to make a more informed decision.
How marketable is the property you are purchasing? What is the condition of the home? Is it unique? How much money are you putting down? Lenders always need to think about the ability to pay-off the mortgage in the event of unforeseen circumstances. The property provides a way to recover at least a partial amount if you were to default on the mortgage. If you are weak in some of the 5 C’s of credit, lenders may ask for more money to be put down on the property so that their collateral position becomes stronger (reduced LTV – loan to value is a measurement used to determine the amount of capital required as a down payment, in addition to rate and terms of the mortgage).
Credit is one of the few instances where past performances are an indicator of future results. Your credit score carries a lot of weight when you apply for a mortgage. History tells us that the majority of clients pay their mortgage first, their car second, and the rest after. It is very important that you make all your payments before the due date on your statements. We need the complete story on any credit hiccups that your may have encountered so we can properly relay the story to our lenders.
This is your net worth. It is assets minus liabilities. Are you in a positive position? Will you have access to any extra funds should you encounter any unforeseen circumstances. Typically, the largest form of capital is the amount of money that borrowers have invested in a property. Otherwise known as a down payment, lenders want to see how invested you are in a property before making a decision. Lenders want to know the source of the down payment before making a decision on approval.