Buying a house can be daunting. 

Buying a house was the reason I started this blog. It’s the spark that ignited my passion for personal finance. 

In 2016, I bought my house in an extremely competitive housing market. I was rushing to my lawyer’s office on my lunch break, I was driving around town with my agent every day after work and every weekend, and the entire month of house hunting was a whirlwind. 

I was overwhelmed and didn’t have time to learn the ins and outs of how mortgages worked in Canada. I rushed through the process without considering all of the options available. Now that the dust settled, I have time to prepare for my next home. 

One of the things I didn’t know about was Mortgage Agents and Brokers. I was not familiar with their roles and services until AFTER I bought my house. I did not know how they could help new homeowners.

Recently, Malcolm Stoffman reached out to collaborate. I asked him to explain what new homeowners need to know when they are starting to look for a house, so here it is! 

Malcolm shares the 5Cs of Credit, meaning how lenders assess who will get money for their mortgage, and how much. 

[Guest post by Malcolm the Mortgage Guy]

5 C’s Of Credit

Lenders (AKA banks, credit unions, financial institutions) are in the business of balancing risk and return and in order to do this effectively, they need models and tools to better understand the borrower, the property and the risks associated with both. For years, lenders have been relying on the so-called 5 C’s of Credit, in order to understand and price their risk.

As a Borrower (AKA potential home buyer), you need to understand that if you or your property pose a higher risk, then you will pay a higher rate.

Higher Risk = a Higher Rate.

So what are the 5 C’s and how do they affect risk and in turn rate?

1. Capacity – What is the borrower’s ability to repay the loan?

• The lender’s primary concern is how you intend to repay your mortgage and they
  will consider your income (from all sources) against your monthly expenses.
• Proof of income will differ depending on your employment status: salaried,
  commissioned, self-employed, full time, or part-time.
• Lenders will determine what types of documents are required to confirm your
  income and how much mortgage you can qualify for.

2. Capital – How much equity does the Borrower have in the property.

• Lenders will consider your net worth and how much equity you will have in
  the property. The greater your net worth and the more equity that you have in
  the property the lower the risk to the lender.
• The source of the downpayment is an important consideration as it may come
  from your own resources in terms of savings or investments or it may be gifted
  from a family member.

3. Character – Does the Borrower tend to make good financial decisions.

• Lenders want to know that as a borrower, that you are trustworthy and will meet
  your payment obligations to them.
• Lenders consider your length of employment, your savings and investment and
  your responsible use of credit determine your character and how to price their
  risk.

4. Collateral – Risk associated with the property itself.

• Lenders need to understand and price for risks associated with the underlying
  property.
• Typically properties must be appraised by a qualified professional in order to
  provide lenders with certainty about the property and its value.
• Lenders will consider details such as the location (urban, suburban, or rural),
  property type (single family home, condominium, cottage), and usage (owner-occupied
  or rental).

5. Credit – Does the Borrower consistently (and historically) repay their loans and other
debts on time and as agreed.

• Loan repayment and bill payments are reported to the Credit Bureaus
  and are known as your credit rating (AKA – credit score, credit history or credit
  report)
• Provides lenders with a snapshot of the borrower’s credit habits and their
  propensity to pay or repay obligations on time and in full.
• Lenders can then predict the borrower’s likelihood to repay and then price their
  risk accordingly.

About: Malcolm the Mortgage Guy, has access to dozens of lenders and hundreds of mortgage
products and by understanding the 5 C’s and your unique situation, he can help you to get them
best possible mortgage solution for you.
Call/Text Malcolm the Mortgage Guy at 905-517-4228 for Free, Unbiased Mortgage Advice, that
could save you thousands in fees and interest over the life of your mortgage.

Malcolm Stoffman
Mortgage Agent
DLC Canuck Mortage Group (FSCO #12503)
Independently Owned and Operated