When you get a mortgage, lenders carefully analyze the details of your application before agreeing to proceed with financing.

Many lenders determine how likely borrowers will be to repay a loan by making use of the so-called ‘5 Cs of Credit’ – Capacity, Capital, Collateral, Credit and Character.

Here’s a brief look at each:

1. Capacity

Based on your financial situation, how capable are you of repaying the mortgage?  Lenders will review your income level and monthly financial obligations – mortgage payments typically should be no more than 35% of your gross income.

2. Capital

This is your down payment.  From a lender’s perspective, the higher the down payment, the more likely it is that you will do all you can to keep up with the mortgage payments.  Capital may also reflect your ability and willingness to save money and accumulate assets.

3. Collateral

In a real estate transaction, the lender needs the assurance that, should the borrower be unable to repay the mortgage, the property that is mortgaged is marketable and can be resold.   This is why lenders may often require an appraisal of the value of the property.

4. Credit

Credit is your past and current ability and willingness to repay credit grantors. The sole source of your history of repayment is most often your Equifax credit bureau. Along with your active and closed accounts, detailed information on limits, minimum payments, past missed payments, current balances, and current status of the account is included.

5. Character

This is the general impression you make on the lender, a subjective opinion as to your trustworthiness and ability to repay the loan. Your educational background, professional experience, length at your current employer and current residence will be considered.

Unsure of how you measure up against the 5 Cs of Credit?  Please give me a call to discuss.

A great resource for anyone looking to understand credit – building and maintaing good credit – is Richard Moxley’s book ‘Nine Rules of Credit‘.

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