The 5 Cs of Credit

Get your ducks in a row!

If you’re considering a pre-approval, you know it makes good sense to get it early on in the homebuying process. Your income and credit are basically the two largest factors in getting pre-approved. The lender is qualifying your worthiness as a borrower. You are getting a budget to shop for a house and securing a rate, you have a rough idea of a monthly payment. However, a pre approval is very different from the real deal. Here’s why.

Now you’ve found a property, and you’re ready to get your firm approval and waive your financing condition. This time around, the lender is looking a lot more closely at your financial situation, and the property in question will have to pass muster as well.

I advise you to be ready for a variety of questions, and have paperwork to back up everything you claim. Put yourself in the lender’s shoes: they’re about to hand over several hundred thousand dollars to a virtual stranger, which won’t come without with some scrutiny and hard questions. Keep in mind it’s not personal. Keeping risk and fraud to a minimum is reflected in a lending institutions’ stability, reputation, and ultimately, integrity. The more you disclose, the more relevant paperwork you have, the faster your file will close, and the less conditions they will demand. Most folks don’t always have these important documents right at their fingertips, but being well prepared translates to a successful approval for you. Now is a great time to start looking for, and organizing those documents.

Here’s where we talk about the “5 C’s of credit”. These guidelines are essentially what govern the decision of whether or not to extend credit to an applicant.

This will probably answer the question, ‘why do they care to know about that?’

Consider this: imagine you wanted to buy a house, at asking price, with cash up front. Your offer would likely be signed back in minutes! But, if you wanted to put in an offer with multiple conditions, demands, below market value, and you could not show the sellers that you were serious/financially viable, you might see some hesitation on the other end, right? Let’s equate the seller with the lender. They have something you want, so let’s make it easy for them to want to give it over to you.

My strategy for a successful approval? Let’s anticipate the questions, and prepare the best defense: information.

Character:  ‘will I pay’?… the lender wants to understand you better.

Expect personal questions. Your birthdate, SIN, addresses present and former, marriage status, dependents, etc. Employment present and former; are you stably employed or do you move jobs frequently? Do you have tenure in the same industry?

Capacity:  ‘can I pay?’… your ability to manage the payments.

This ties in somewhat with your employment; it focuses in on your cashflow, debt, household income, and the likelihood of you paying the mortgage on time, every month. If the terms ‘TDS’ or ‘GDS’ mean anything to you, this is the category it falls under. Those calculations of 40% and 32% are not arbitrary, they are proven formulas for the ability to manage debtload.

If you’re self employed, then this will be looked at a little closer than if you’ve got a salaried position. You will have to prove to the lender that your income is stable, secure, predictable, and sufficient to service the monthly mortgage debt. If you can’t, do you have cash savings just in case? What’s your back up plan?

Capital: ‘what have I paid?’… What you already own/your net worth

If you can show the ability to own things outright, be it vehicles, properties, investments, then you are demonstrating good habits to a lender. Be prepared to show proof of ownership and bank statements to back it up. Having a sizeable down payment can fall under this category.

Creditworthiness; ‘how I have been paying’… your credit history.

Simply put, your credit history holds a lot of weight for a prospective lender. Paying on time, more than your minimums, keeping balances low and keeping your credit limits realistic are all part of a healthy credit history. See the credit page for more information on how to better understand and improve your score.

Collateral: ‘what if I don’t pay?’…what risk are you taking?

With secured debt, the answer is pretty clear. If you don’t pay your mortgage, the bank can implement power of sale or foreclosure, and sell your home to recover their loss. When banks sell off properties, it’s rarely at market value! They’re looking for a quick sale to get back as much as they can, as quickly as they can. They’re not looking to maximize profit. It’s not likely you’ll recover much of your investment, if at all.

Prove it!

Verification of employment may take many forms. It’s a good idea to expect to have to show Notice of Assessments*, T4’s, paystubs, an employment letter will likely be required. Have these ready to go and it will save you a great deal of time later on, getting your approval finalized much more quickly.

If you’re showing income from spousal or child support, you’ll need to present the legal agreement showing the amount and duration of the payments. The same holds true for any other stated income, i.e. severance, pensions, etc.

If you own anything outright, it may be asked of you to show proof of this as well. With investments and cash savings, bank statements, annual or otherwise may be asked for. Property owned outright will be accountable as well.

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Areas of Service

My primary area of service is within the Halton and Wellington regions. As a Mortgage Agent I travel extensively and am able to service areas outside those mentioned. I'd love to hear from you, get in touch with me today!


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The AMP designation

AMP certification
The AMP or Accredited Mortgage Professional accreditation is the only designation in Canada that recognizes a proficiency standard for professionals in the mortgage industry. It is awarded by the Canadian association of accredited mortgage professionals (CAAMP), an association striving to achieve a standard of excellence for mortgage agents across the country.

AMP’s are committed to a high standard of professionalism, ethical conduct, and continuing education. The AMP is not mandatory at this time. It is an elective designation that I have chosen to earn. I hope this tells you a little about my commitment to excellence, and respect for my profession.