The Five C’s of Credit: Mortgage Qualification Criteria
Author:
Karli Shih
Date: January 1, 2016
The five "C’s” of credit govern a lender’s decision-making
process in evaluating mortgage applications. They include:
Character, Capacity, Conditions, Capital and Collateral. We’ll
look at each one more closely below.
Character
Relaying a client’s character and integrity is very subjective, and can be difficult to quantify but a credit score can help.
Lenders use credit reports to determine the likelihood you’ll make
your mortgage payments on time if they grant you a mortgage.
Late payments, too many credit inquiries and even unpaid parking
tickets can lower your score. A good mortgage broker can help
explain the background story of a poor score to help applicants
qualify despite lower scores. Proper representation of a
client’s credit score can sometimes turn a declined application
into a commitment for financing.
Capacity
Capacity speaks to cash flow and your ability to make your
mortgage payments. Lenders have varying debt-to-income ratio
requirements, and many treat various types of income differently.
Whether you’re self-employed, retired, employed part-time or
full-time, if you have commission or bonus income, rental or
investment income, each type can be treated in different ways.
Lenders may also not always allow the full amount to be used on an
application. You may need to speak with a mortgage broker to
help you navigate the requirements of each lender to see if you can
qualify based on your income type. Knowing how lenders look at
your other debts on your application, or how a guarantor’s income
would be viewed, can also help you increase your likelihood of an
approval if your debt levels push the boundaries relative to your
income.
Conditions
Economic factors influence how readily lenders will grant
mortgages to all clients at a particular time. Lenders may
tighten and relax mortgage rules across the board, and at other times
just region by region depending on the economic climate in each one.
Conditions such as the purpose of the loan also influence how a
lender will view an applicant. Typically a refinance to fund
investments or renovations can be positive in a lender’s view.
Refinancing to consolidate higher interest debt is also very common.
A lender will look favourably on a refinance which contributes to a
solid financial plan.
Capital
Capital refers to the equity in your property. Equity is the
difference in value between your mortgage and the value of your
property. The more equity you have in your property, the less
risk a lender takes on by lending on that property. With a
higher down payment, or with more equity in your home after a
refinance, mortgage rules are less stringent and this makes
qualifying easier.
Collateral
The final C is Collateral, which refers to the property being
financed. Lenders have varying rules regarding properties they
will finance, which can include minimum size requirements, location,
leasehold properties vs. freehold, remaining number of years for use
of the building as determined by an appraiser, and value to name a
few. Many other factors come into play, too many to cite here.
An experienced mortgage broker can help determine whether a lender
will finance a specific type of property. Appraisals are often
required to cover the vast amount of detail which lenders review in
determining whether they’d extend a mortgage on a particular
property. The property’s value is just a starting point.
If the value of the property matches the purchase price, that’s a
good start, but some lenders have rules regarding the method of the
valuation, and others require specific appraisers to provide the
report. When values are too low, the lower value becomes the
amount from which equity is calculated and can affect the maximum
mortgage amount on a particular property.
Given the vast array of issues that can impact a mortgage
application, working with an experienced broker can help you both
maximize your savings regarding rates, and ensure your best chance of
an approval for the mortgage you want. Please feel free to
contact me should you have any questions, I would be happy to help.
Mortgage Lending Criteria Credit Mortgage Rates
