When applying for a mortgage, it is common knowledge that you want to have good credit. But what exactly is good credit? Below is a quick summary of what and how a financial institution examines your credit worthiness. It is separated into 5 categories, known as The 5 C’s of Credit!
1) Credit – The main way a lender can predict you are going to make consistent, on time payments is by reviewing your repayment history. They do this by reviewing your credit score (also known as beacon score) to ensure you have a proven track record of managing money already borrowed to you.
2) Capacity – One of the most important of the 5 C’s, Capacity is the actual ability of repaying the loan. The lenders will review two things, the Gross Debt Service (GDS), as well as the Total Gross Debt Service (TDS).
· GDS is the costs of owning a home (Mortgage Payment + Heat + Property Taxes) versus the gross income you make. Typically, lenders will only approve a maximum of 39% of your income going towards carrying those 3 costs.
· TDS factors in GDS as well as any other monthly financial commitments (example a car loan or credit card payments). As for this ratio, lender will cap you at 44% of your income covering all additional expenses.
3) Capital – This is determined by what you as a buyer have for an investment in the property, known as a down payment. 5% is the minimum down payment requirement.
4) Character – Is best described as a borrower’s trustworthiness of repaying a loan. This trustworthiness is proven through your length of employment and ability to save. Essentially the bank wants to see an active track record that you use your credit responsibly.
5) Collateral is considered additional security provided to the lender. The property itself and its value, location and characteristics can be considered as security, but collateral can also include outside properties or land owned, which helps lender feel “Secure” in loaning the funds.
By knowing what lenders are looking for in an application you can prepare and improve your position when it comes to purchasing your dream home. With so many products and options available, I am great a resource for information and for any questions you may have. Give me a call at (416) 728-2404 and thank you for reading!