As a Mortgage Broker, my job involves creating your story to present to lenders. I work to show the lender the facts about you as a borrower but also help them to see past the data to the person I’m assisting. When lenders are making this assessment, they use the 5 C’s of Credit – a simple way to create an overview of you as a potential borrower. If you come up short in any of these areas, the Lender may have some concerns and my negotiating skills will be put to use. The 5 C’s consist of:
This is your general trustworthiness to repay loans. The Lender will look at your job stability, tendency and ability to save and your utilization of credit.
This will cover your ability to repay loans. Lenders look at your debt service ratio, which is your debts in relation to your income, as well as payment history to determine your capacity.
Two ratios are calculated when applying for a mortgage:
-GDS or Gross Debt Servicing – The housing costs for the property being purchased and condo fees, if applicable. The maximum ratio is 39% of your income (OAC).
-TDS or Total Debt Servicing – This is all of your monthly credit obligations, credit card payments, vehicle payment, loan payments, housing cost for the property being purchased and condo fees, if applicable. The Maximum Ratio is 44% of your income (OAC).
The Capital is the amount of money that you have saved including the amount you have to invest in the property, also known as the downpayment. A minimum of 5% on the first $500,000 and 10% on the amount exceeding $500,000 is required.
The Collateral is the security provided to the Lender which is a combination of the purchase property as well as outside parties who guarantee the loan. On purchases where less that 20% is being put down against the purchase, default insurance is mandatory. We refer to these mortgages as High Ratio Mortgages. Premiums for this insurance are generally added to the mortgage amount but borrowers also have the option to pay them up front.
Mortgages with a down payment of 20% or more are referred to as Conventional Mortgages. In general, these purchases aren’t insured although default insurance may be required in some circumstances.
The Credit Bureaux show the lender a snapshot of your repayment history over a period of time. They also provide a Credit Score which is the primary measurement factor. Most lenders want to see a score of 650 or greater although exceptions are made to this if they can be mitigated.
There are some factors that will influence the 5 C’s of credit for you, and this is why you need to have a a mortgage broker in your corner to fight for you and show lenders your ability to be an excellent borrower. Contact me if you would like advice or to simply understand how your 5 C’s of credit look to a lender.