The 5 C’s Of Credit — How it Affects Mortgage Approval
Your Credit Score and How it’s Determined
Your credit score plays a major role in the mortgage process. Banks and lenders will need to see your creditworthiness prior to approving you for a loan. The better your credit score is, the better chance will be at getting favourable terms, including a low mortgage interest rate.
There are five main factors that go into determining your credit score, the five C’s of credit:
- Capacity. What is your track history of borrowing and how much debt have you shown that you can comfortably handle in a positive way?
- Character. This boils down to whether or not you pay your bills, and if do you do so in a timely fashion.
- Capital. Lenders want to know that you have some cash and/or assets to cover your mortgage, should you find yourself in financial trouble.
- Conditions. What is the current state of your personal finances; what has your financial situation looked like in the last five years, and what will they look like over the next five years?
- Collateral. Cash might be most important, but what kind of collateral do you have with which to secure the loan should your financial situation become less than ideal?
Getting Your Credit Report
Before you fill out a mortgage application, it might be a good idea to request your credit report in order to get a better sense of your creditworthiness. There are two Canadian credit bureaus: Equifax and TransUnion and it’s a good idea to get an update credit report from each, every 6 months. There are also credit monitoring services available, to help keep you informed should something suddenly change with your credit.
Your mortgage broker can also help you to obtain your credit report and advise you on ways to improve your credit score.
Understanding Your Credit Report
There are many ways to get help with understanding your credit report. You can visit the Equifax or TransUnion, and access their online resources for more information. You can also contact the service department of the credit bureau which you pull your credit report from, to go over any specific questions. Part of our mortgage broker service includes a review of your financial situation, so our mortgage team can also pull your credit report for you — and answer all your questions.