Understanding the “Five Cs of Credit”

Thanks to Ron MacDonald of Invis for the following article explaining what lenders are looking for in  a client when considering mortgage lending:

When you get a mortgage, lenders carefully analyse the details of your application before agreeing to proceed with financing.  Many lenders determine how likely borrowers will be to repay a loan by making use of the so-called “5 Cs of Credit” - Character, Collateral, Capital, Credit and Capacity.  Here’s a brief look at each:  

Character - this is the general impression you make on the lender, a subjective opinion as to your trustworthiness and ability to repay the loan. Your educational background, professional experience, length at your current employer and current residence will be considered.

Collateral - in a real estate transaction, the lender needs the assurance that, should the borrower be unable to repay the mortgage, the property that is mortgaged is marketable and can be resold.   This is why lenders require an appraisal to determine the value of the property.  

Capital - this is your down payment.  From a lender’s perspective, the higher the down payment, the more likely it is that you will do all you can to keep up with the mortgage payments.  Capital may also reflect your ability and willingness to save money and accumulate assets today and in the future.

Credit - this is an estimation of how well you meet your credit obligations, as measured by the two national credit agencies (Equifax & Trans-Union).  These credit agencies takes information on payments on major credit cards, auto loans, leases, etc. for the last six years and produces a credit score.  I can certainly offer you advice on how to make sure your credit score is as high as it can be.  

Capacity - based on your financial situation, how capable are you of repaying the mortgage?  Lenders will review your income level and monthly financial obligations - mortgage payments; (Principal, Interest, Property Taxes & Monthly Heat) typically should be no more than 32% of your gross income.

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