The five C’s of mortgage credit

There have been many mortgage rule changes over the last few years

There have been many mortgage rule changes over the last few years.

It has been challenging to say the least for smart Canadian consumers like yourself to wade through. One thing that has not changed however is that your mortgage application will be adjudicated based on your credit picture. The rate and terms you are offered will be directly correlated to how strong your credit is. Here are the 5 C’s of mortgage lending to give you a better understanding of what exactly they are looking for.

Capacity

Can you afford the payments along with other living and credit expenses? Are you comfortable that you can? Banks want to know if you can handle the debt and if you’ll be able to repay the mortgage loan. Your income is reviewed very carefully to be sure.

Character

As past behaviours predict future tendencies, they put weight on your 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.

Collateral

How marketable is the property you are purchasing? Is it unique?

How much money are you putting down? Lenders look to the marketability of the property. Banks always need to think about the ability to sell the property in the event of foreclosure. The property provides a way to recover at least a partial amount if you were to default on the mortgage. If you’re weak in some of the five C’s of credit, they might ask for more money to be put down on the property so that their collateral position becomes stronger.

Credit

Credit is one of the few instances where past performance is 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 – banks will review the credit bureau completely to see if you had a slight bump in life or if there is a pattern of non-payment.

Before you apply for a mortgage, you should take the time to review your credit report. If you find any mistakes clear them up right away.

Capital

This is your net worth. It is assets minus liabilities. Are you in a positive position?

Do you have access to any funds should you encounter any unforeseen circumstances? Typically, the largest form of capital is the amount of money that you 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.

The truly sacred number in the mortgage world is two. They like to see two types of credit, reporting well for two years on your credit bureau so they can obtain a true picture of your credit worthiness. If you had a bankruptcy or credit issue in the past, having two years of pristine credit demonstrates that you are back on track. Keep your balances at 50% of the available limit and make sure you make all your payments on time.

If you are self-employed, commissioned, receive bonuses, are seasonal, two is definitely your magic number. Mortgage lenders will look at a two-year average of all these variable types of income before they are willing to include them for mortgage qualifying purposes.

There you have it – the five C’s that lenders analyze when reviewing a mortgage application. If you have any questions or concerns feel free to contact your local well qualified mortgage professional, we’re here to help!

Pam Pikkert is a mortgage broker with Mortgage Alliance – Regional Mortgage Group in Red Deer.

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