Capacity, Collateral, Capital, Conditions and Character

5 C’s of Credit

With mortgage rates still being at very low levels it may be time to look at getting into the local real estate market. The condo market has been over supplied for the last several months so there are some great prices to be had. January showed an uptick in activity, so if you are thinking about buying your first place now could be the time! But wait, before you look at buying a place it is important to ensure that you have your ducks in a row when it comes to your financing. The 5 C’s of credit are what lenders look at when deciding whether to grant the approval to the borrower.

1) Capacity – This refers to your ability to repay the loan being requested. Do you pay your bills on time or have you had passed slowness? Do you have a salaried job with guaranteed income or does your income fluctuate? Can you demonstrate that you have a regular income through a paper trail?

2) Collateral – The form of security for the loan. In the case of a mortgage what is the loan being secured against? Is it a single family dwelling? a condo? is the condo stratified or is it a co –op or leasehold. Depending on the security will determine how much a lender will loan you against the security.

3) Capital – The amount you are investing into the project/purchase. Where is that money coming from savings, is it a gift, a loan? Recent changes to our Federal rules dictate that you put in at least 5% from your own resources when purchasing a home under $1,000,000. Over $1,000,000 you must put 20% down. There is one program which allows you to borrow the 5% from a line of credit, or credit cards – but you would have large payments for the unsecured debt and you pay a premium on rates and the insurance premium payable for this program so you would want to make sure the numbers make sense before going this route.

4) Conditions – What is the overall economic climate like nationally or in your area? In a strong real estate market the lenders are more likely to say yes to the loan vs. a market where values are expected to fall.

5) Character – This is a very subjective area, what impression have you left with the lender? We have all heard stories where one has made the incorrect judgment of a person’s character based on their appearance. It would be a good idea to ensure you are presentable before meeting with the lender.

What to have ready when meeting your mortgage broker or lender?

If you are salaried have your employer supply you with a letter of employment outlining your position, start date and remuneration. If you get a bonus each year have the employer lay out what the bonus earned was for the last 2 years clearly on the letter. This way if you have received a salary increase you will be able to easily document what portion of your past earnings were bonus. Then the lender can take your new salary plus average bonus into account when considering your application. You will also be asked to support the letter of employment with a recent pay stub.

If you are self employed give the lender as much documentation as possible. Typically required are the last 2 years tax filings (T1- generals) and the last 2 years Notice of Assessments from CRA. If you are incorporated, you will also need to supply the financial statements and balance sheets for the last 2 years.

The lenders will ask for you to demonstrate the source of your payment. They will typically request a 90 day history of the funds and you will have to show the source of any larger deposits of $5000 or greater. Take time to print these out and ensure that your name is on the statements proving your ownership to the accounts.

A bit of homework can make the approval process go that much smoother for you.