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Most Canadians aren’t aware that credit is not just a score or an ability to make payments on time, but is actually composed of a few different categories; hence, the five C’s of credit:

1. Credit shows the lender a snapshot of what the borrower’s repayment history has been over a period of time. This is the only way a lender can predict the borrower’s propensity to make future payments. The credit score is the primary measurement factor.

2. Capacity is the ability to repay loans. Arguably, this is the most critical of the five C’s of credit.  Lenders look at debt service ratios (total debt service and gross debt service), as well as payment history in order to assess a borrower’s capacity, or ability, to repay a loan. 

3. Capital is the amount of money that a borrower has invested in a property. It is otherwise known as a down payment. Lenders want to see how invested you are in a property before making a decision.  Loan-to-value is a measurement used to determine the amount of capital required as down payment, in addition to the rate and terms of the mortgage. 

4. Character can be described as a borrower’s general trustworthiness to repay loans. Factors such as length of employment and the borrower’s propensity to save and utilize credit responsibly all help to establish character.

5. Collateral can be thought of as additional security provided to the lender. The subject property itself – its value, location and characteristics – can be thought of as security, but collateral can also include outside parties that will guarantee the loan. These parties are often referred to as covenant partners.

The goal is to get a “YES” to your deal with a lender. The five C’s outlined above determine a borrower’s ability and willingness to make payments. Understanding what a lender is looking for allows you to set yourself up to put your best foot forward. If your investments are analyzed and planned correctly, every “YES” from your lender will bring your closer to achieving your goals.

 

Source: Canadian Real Estate Wealth

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