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A mortgage borrower’s guide to the 5 C’s of Credit


So you want to apply for a mortgage, but do you actually know what a mortgage lender is going to look for in your credit application? You will be much further ahead if you understand exactly what a lender wants to see from you versus guessing what their priorities and major concerns are in assessing your “creditworthiness”.
As it turns out, there is one very simple formula that basically all lenders use in one way or another in determining how good of a borrower you will be. And best of all, it isn’t a secret!
This analytical measurement is called the 5 C’s of Credit and it is what lenders have used to determine a borrower’s reliability since the” beginning of time”. Fully understanding the 5C’s of Credit will provide you with some insight into what lenders like to see and how you can work on creating your own perfect credit application.
The 5 C’s are character, capacity, capital, credit and collateral. It’s important to note they are not set-in-stone rules and are not weighted the same by all lenders. What they are is a straightforward way of thinking about a borrower. One “prime” lender might care more about credit while an “alternate” lender is more concerned with the collateral. Some lenders will use an electronic point systems for each category, while others will just “keep the 5 C’s in mind” when underwriting a mortgage application.
1. Character – Character measures how trustworthy and honest the borrower is and as history is the best predictor of the future, a lender will examine the past credit of the borrower. Beyond your credit, lenders also look at your overall “stability”. How long have you been at your current address and job? For me, this is the most important of the 5 C’s of Credit as even a borrower with a steady source of income could still make payments late if they are irresponsible.
2. Capacity – Capacity is sometimes called cash flow and is basically your financial ability to repay the mortgage. Where do you work and how much do you earn? The lenders will measure your capacity by calculating debt-to-income ratio or debt service ratio.
3. Capital – Capital is the amount of down payment you have available and where you are getting it from. Have you saved it, are you borrowing it or is it a gift from family? Given recent Federal Government rule changes, the amount of down payment you have will determine what mortgage interest rate you qualify for.
4. Credit – Your credit score is used to reflect your borrowing history, which is pretty much what every lender is most interested in learning about you. You should check your credit reports regularly from the two major bureaus – TransUnion and Equifax. Anything that looks wrong should be addressed immediately as I have personally seen a small mistake grow into a big problem on a credit application on many different occasions.
5. 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.

If you want to work with an experienced Mortgage Professional who will provide honest and accurate feedback about you as a borrower you should contact the MortgageGirl today! Banker turned Broker with 35 years of experience. Email – Call – 780-433-8412 and Visit the Mortgagegirl website. Follow her on Facebook and Twitter

3 thoughts on “A mortgage borrower’s guide to the 5 C’s of Credit

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