The Five C's of Credit

As a consumer it is important to understand how your credit will be evaluated. The categories lenders will primarily use to judge your credit are known as the five C's of Credit: Capacity, Capital, Collateral, Credit History, & Character. Below is a brief description of each.

Capacity: Denotes the consumer's ability to repay loans. Lenders will look at something known as your debt ratio, this is comprised of both your Gross Debt Service (GDS) and Total Debt Service (TDS). Gross Debt Service refers to the percentage of the borrowers income that is required to pay monthly housing costs such as mortgage payments, property taxes, heating, strata fee's (if they apply), etc. Total Debt Service is the percentage of a borrower's income that is required to pay housing costs (GDS) plus all other debt obligations, such as credit card payments, car payments, line of credit payments, etc. Lenders will also look at the borrowers overall payment history in order to properly appraise a borrowers capability to repay a loan.

Capital: Commonly referred to as a down payment, capital recognizes a borrower's total investment in a property. Lenders want to have a sense of how invested in a property a borrower is before they loan money. A Loan To Value (LTV) measurement is used to determine the percentage of the home cost that the borrower covers with their down payment and the amount the lending institution must put forward. For example if a borrower needs $95,000 to purchase a $100,000 property, the LTV would be 95%.

Collateral: Refers to other assets that a borrower has that can be used as a security against the borrowed money, though typically, mortgages or home equity lines of credit are secured against the value of the customers home. Collateral from outside parties (parents, family, & friends) can also be used to guarantee a loan.

Credit: Provides a picture of a borrower's credit and repayment history over a specific period of time. Lenders will use this as a metric to predict your future behavior and ability to make mortgage payments. Your credit score is one of the essential tools of analysis. To see what makes up your credit score please see my blog post "What Goes Into Your Credit Score" through the link to my website at the bottom of the page.

Character: A borrower's character is measured by looking at a number of categories of reference, including residence, stability of career and industry, etc. A borrower's ability to voluntarily provide accurate and complete information is also used to evaluate their character. A number of questions that will be asked in reference to character. Has the customer used credit before? How long have they been at their current job? Does the client regularly pay their bills on time? How long has the customer lived at their current address?

I hope this overview of the 5 C's of Credit has been helpful. Please contact me if you have any questions.

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Roger Townsend

Roger Townsend

Broker
CENTURY 21 People's Choice Realty Inc., Brokerage*
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