The 5 C's of Credit
All lenders underwrite mortgages using an approval process called the five C’s of credit. How you rate in each of these categories determines whether you are approved and if so, what the rates and terms will be. The five C’s of credit are:
Collateral – Collateral reflects the strength in the property itself. All lenders rate an owner occupied, single family residence as the highest quality. As property moves further from that description the rating is lowered. A condominium, a rental property, a property in a rural location or acreage would all be examples of property that would be rated lower than a standard property
Credit – When you borrow money from a bank, your repayment history is reported to the credit bureau. All lenders refer to the credit report when considering your “creditworthiness” before lending to you. If you are late on making a payment it is reported for all future lenders to see. Length of time on the credit bureau, repayment history and how close you are to your credit limits are all taken into account.
Capacity – When lenders talk about your capacity they are referring to your ability to manage the mortgage payment based on your proven household income as well as how much other debt you have. They consider your income, the nature of that income (full-time, part-time, self-employed) and whether you can prove that income.
Capital - Capital refers to your current net worth and how much equity you have in the property. Equity is the difference between the current market value of your home and all outstanding mortgages against the property.
Character - Character is the most subjective rating but reflects a combination of all of the above as well as job stability, net worth, bankruptcies and payment obligations such as child support. Remember, lenders do not know you personally and therefore rely on the documentation that is available to them.
If you have excellent ratings on all of the five factors, then you should have no problem getting an “A” mortgage with any bank. We would then look at the rates and features to determine which mortgage is best.
If you have lower ratings in some of the categories, don’t worry – we may still be able to get you a mortgage. “B” and “C” mortgages are widely available with various institutions. Some lenders even focus entirely on these mortgages.
Click here to get an understanding of your "Beacon Score".