Whether you are buying your first home or have been a home owner for years, when you are looking at purchasing a property, finding the best mortgage solution for your specific situation can be an intimidating experience. Working with a mortgage broker will ease much of the tension – you can rest assured you will receive the best representation by working with someone with years of experience and access to many lenders. However, knowing the basics behind what lenders are looking for will help you better understand the process and be more comfortable as your broker goes to work for you.
The Five C’s of Credit
Credit is one of the biggest deciding factors when lenders consider you for a home loan. What you may not know, is that credit is not just a score that rates your ability to make payments on time. There is a method used by lenders to determine a borrower’s credit worthiness that weighs five different categories to gauge the possibility of default: capacity, capital, collateral, credit and character.
Capacity
Lenders consider capacity to be the most critical of the five categories; it refers to the borrower’s capacity to repay a loan with the primary source of repayment – cash. The lender’s main concern is how you intend to repay your loan and will consider your income (from all sources) against your monthly expenses. This is represented as TDS Total Debt Service Ratio and GDS Gross Debt Service Ratio.
Capital
Capital is the amount you have saved as a down payment – an indication of how invested you are in purchasing a property. You capital will demonstrate your ability to save and accumulate assets. Lenders use a loan to value (LTV) measurement to determine the amount of capital you need as a down payment as well as to decide on the rates and terms of your mortgage. The lower the LTV the lower the risk for the lender.
Collateral
Think of collateral as additional security for the lender. The property, its value, location and characteristics are one form of security; the lender wants to know that a property is marketable and can be resold if necessary. Collateral can also extend to other outside parties who can guarantee the loan (co-signers).
Credit
Your credit history gives the lender a snapshot of your repayment history over a period of time. The lender needs to feel comfortable in your likeliness to make payments; by examining your payment history with existing credit relationships they can predict your predisposition to pay. Your credit score is the most dependable measurement a lender can use to determine your likelihood of payment.
Character
Lenders want to know that as a borrower, you are trustworthy and will meet your obligations to them. Lenders will take factors such as length of employment, your tendency to save and use credit responsibly to establish your character and determine whether you are a borrower that they can trust with their loan.
Of course, the goal is to get a lender to agree to give you a mortgage that best suits your needs, and your mortgage broker will help to show that you are a good investment. By understanding the five C’s, you will know exactly what a lender is looking for and you can better work with your mortgage broker to “package your application” so that it shows a low level of risk, this will entice the lenders to offer you their best rate and terms.
