The Five C’s of Credit
When discussing mortgages with clients the topic of credit inevitably arises. They are curious as to what lenders are looking at when deciding your creditworthiness. Lenders are trying determine the level of risk of mortgage default associated with individual borrowers. The five C’s that they are looking at include Character, Capacity, Capital, Collateral, and Credit.
Character is reflected by the borrower’s credit history. Lenders will look at your past payment history to ensure you make your payments and make them on time. They might also look at how long you have been at your current employment and address. Lenders want to see stability.
When considering capacity, lenders look at your debt service ratios and determine if you have the necessary resources (income) to repay your mortgage as well as your other monthly debt obligations.
Capital is the amount of money that the borrower has or in other words your net worth. Lenders will look at your assets in comparison to your debts and determine your overall net worth. They want to see that you have some liquid assets in case something happens.
Collateral is the asset that acts as security in the event the borrower defaults on their loan. In this instance the asset would be the home that the mortgage is for. Lenders need to ensure that they can recover at least part of the loan if you default on your mortgage.
Lenders will review your credit report along with your credit score, frequently referred to as your beacon score. This will look at your repayment history, whether your current credit products are at or near their limits, and how long you have had credit.
As you can see there are many factors that lenders look at when determine a client’s creditworthiness. Not all categories have to be perfect as lenders look at credit as an overall picture, but you want to show as little risk to the lender as possible. If you have any questions or concerns about credit let me know!