The 5 C’s Of Credit and how it Affects Your Mortgage Approval
Your Credit Score and How it’s Determined
Lenders analyze five different factors when reviewing your mortgage application and they are often referred to as the 5 C’s of credit. When applied to your mortgage application the lender determines their risk level in providing you the funds and helps them in their decision on whether to approve or decline your request.
There are five main factors that go into determining your credit score, the five C’s of credit:
Capacity. What is your track record of borrowing and repayment history and how much debt have you shown that you can comfortably handle in a positive way? Banks and lenders need to verify that you can afford the payments along with other living and credit expenses? The lender wants to know if you can handle the debt and 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.
Character. This boils down to whether or not you pay your bills, and if you do so in a timely manner. As past behaviors 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.
Capital. Lenders want to know that you have some cash reserves and/or assets to cover your mortgage, should you incur any unforeseen circumstances.
Collateral. Is a pledge of property or other assets you are borrowing against. Lenders want to know how marketable is the property you are financing should they be in a position to have to sell it if you default? How much money are you putting down? 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.
Credit. This is where your credit report is reviewed. Have you had difficulty meeting payments in the past? Are your credit balances 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.
Getting Your Credit Report
Before you fill out a mortgage application, it might be a good idea to request your credit report in order to get a better sense of your creditworthiness. There are two Canadian credit bureaus: Equifax and TransUnion. It’s a good idea to get a credit report from each, every 6 months. There are also credit monitoring services available, to help keep you informed should something suddenly change with your credit.
Your trusted Edmonton mortgage broker can also help you to obtain your credit report and advise you on ways to improve your credit score.
Understanding Your Credit Report
There are many ways to get help with understanding your credit report. You can visit Equifax or TransUnion, and access their online resources for more information. You can also contact the service department of the credit bureau which you pulled your credit report from, to go over any specific questions. Part of our mortgage broker service includes a review of your financial situation, and answer any questions.
Mortgage Tailors can help you understand your credit bureau and guide you should any areas need attention.