The 5 "Cs" of Credit

Heather in Home Buying, Money 

Ed. Note.  We are very pleased to welcome a new blogger to the Move Smartly team.  Heather Paterson is an experienced mortgage professional who is passionate about educating consumers.  Based in Toronto, Heather practices in the area of Mortgage Financing with Invis.


Ever wonder how lenders evaluate mortgage applications? How do they determine if you are a good credit risk? The answers can be found in the 5 “Cs” of Credit. The lender wants to make sure that there is sufficient assurance that a person can and will pay back a loan and therefore must consider the 5 "Cs" of Credit each time it approves a mortgage.

Character is the general impression you make on the potential lender. The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan. Your educational background, experience in business, length of time at your current residence and marital status contribute to your score on the character scale.

Collateral, in real estate transactions, generally refers to the property in question. If for some reason, you cannot repay the mortgage, the bank wants to know that the real estate property the mortgage was taken out for, is good and marketable real estate. A real estate appraisal will determine the type and value for the property in today’s market. Generally, a property located in a North York sub-division is considered a lower risk than a farm in rural Ontario. Simply put, there are more buyers for the home in the city than for a rural farm, making it easier to re-sell in case of mortgage default and subsequent repossession.

Capital is reflected by your ability and willingness to save money and accumulate assets. Additionally, it is the money you have personally invested in the purchase, otherwise known as your down payment. The more of your own money you invest as a down payment, the more likely it is that you will do all you can to maintain your payment obligations. This fact was evident during the recession of the 1990s where a large number of power of sale properties (properties being sold by lenders due to mortgage foreclosure) were purchased with small down payments. Finally, the higher your net worth (the more financial assets you have), the more you have as a cushion for repayment in the event you run into a financial set-back.

Credit is the evaluation of your habits in performing credit obligations. The information about your credit history is stored at the “credit bureau” and indicates how well you paid your bills over the last 6 years. A lender will evaluate your ability to maintain your obligations and try and determine how well you live within your means. Some individuals make the mistake of not paying the minimum monthly obligations on loans and credit cards with the expectation of making a larger payment the following month. These missed payments appear on their credit report branding them as chronic “late-payers” for the next 6 years.

Capacity to repay the loan is probably the most critical of the five factors. The lender will want to know exactly how you intend to repay the loan. The lender will consider your income as it relates to the loan that you are applying for. Does the monthly mortgage costs represent less than or equal to 32% of your total monthly income? If it is, the probability of you successfully repaying the loan is fairly high. The length of time at your current employment will be considered. Obviously, the longer you’ve been employed with the same employer, the more stable your income will be. Prospective lenders will also want to know about any other sources of income you may have to repay the loan, if your steady income stream is interrupted.

Heather Paterson is an Accredited Mortgage Professional with Invis in Toronto.  She practices in the area of Mortgage Financing. 

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