The 5 C’s of Credit


By Calum Ross

While most people have heard of the three R’s of the environment reduce, reuse, recycle many aren’t aware of the five C’s of credit. If you’re in the market for a home, you should know these like the back of your hand.

A mortgage represents a lot of dough it shouldn’t come as any surprise that the big banks want to do their homework before approving your loan. It’s hard to please your lender if you don’t know what they’re looking for. While your credit score plays a big role in whether your mortgage is approved, there are other factors that are just as important. Saying that though, you will probably find that getting a mortgage is a lot easier if you have a good credit score. If you don’t then you might find that things are a lot harder. Don’t panic though, there are a few things that you can do, such as get a fingerhut credit card account (you can check out the team at creditknocks review of fingerhut here if you like). So please make sure that you realize how important your credit score is. However, as previously mentioned there are other things that your lender will consider before sorting out your mortgage. Getting it sorted out (with help from Credit Repair Today or through other sources) can still give you a boost, but these other factors could help. Keep on reading to find out what they are.

1. Capacity

If the bank approved every mortgage application that came its way it wouldn?t be in business very long. Before the bank will approve your mortgage, they need to see tangible proof that you’ll have the ability to repay the loan.

When buying a home, lenders will stress test your finances with the debt service rations: Total Debt Service (TDS) and Gross Debt Service (GDS). Both ratios look at your monthly income versus your monthly expenses (the GDS includes your monthly debt obligations). You should strive for a TDS of less than 40 percent and a GDS of less than 32 percent. Anything higher could land your application in the rejected pile.

2. Capital

There?s no better way to show your lender that you?re committed to repaying your mortgage than a hefty down payment. A sizable down payment of at least 20 percent shows your lender that you?re a good saver and in it for the long haul.

The loan-to-value ratio looks at the amount of your mortgage compared to the value of the property being purchased. The higher the loan-to-value ratio, the less equity you have invested, the riskier the investment for the bank. The bank is looking to lend to someone with a proven track record of saving money, not someone who lives paycheque to paycheque.

3. Collateral

Collateral acts as a plan B for the banks. In a perfect world, we’d make every mortgage payment in full and on time; unfortunately, that’s not how things always unfold. If you end up being a mortgage deadbeat, your home is the bank?s ace in the hole to recover its funds. As long as your property is marketable and can be re-sold, the bank shouldn’t have any problem recovering most, if not all, of its funds.

Collateral includes your property, its value, location, and characteristics. If you fall on hard times you re-laid off from work, your spouse passes away, or you suffer a sudden illness and unable to repay your mortgage, your lender can foreclose on your home to recover what it’s owed.

4. Credit

Credit is one of the few instances where past performance is an indicator of future results. Your credit score carries a lot of weight when you apply for a mortgage. If you’re always late on your credit card payments and utility bills, what are the chances you’ll suddenly turn your financial fortunes around and pay your mortgage on time? If you don’t already have a credit card, it might be worth looking into no credit check credit cards, to help build your score. I’m guessing probably not very likely.

Banks assess your credit history based on your credit report. In Canada, there are two major credit reporting agencies: Equifax and TransUnion. Both agencies keep track of how much credit you have and if your bills are paid in full and on time. Before applying for a mortgage you should take the time to review your credit report. If you find any mistakes, clear them up right away. If your report is mistake-free yet still shows poor credit health, it may be time to consider credit repair services – head to to learn more about what services and solutions are on offer to those in this sort of situation.

5. Character

Do you come across as genuine and honest, or as a snake oil salesman? The fifth C is best described as a gut feeling. Banks want to lend to someone who is honest, trustworthy and will repay their debts in full.

Factors that influence your character include your length of employment and length of present residence. If you hold a steady job and you’ve lived at your current residence for many years, it’s usually a good sign you?re a responsible borrower.

There we have it, the five C’s of credit. Applying for a mortgage can be a nerve-wracking experience, but it doesn’t have to be.

Hopefully you feel more at ease the next time you apply for a mortgage or loan, as you’ll know exactly what the bank is looking for. If you have a decent credit score, steady employment, and a sizable down payment, you should have no problem qualifying.

If you?re lacking in any of the five C’s, improving just one of the C’s can go a long way in helping you obtain the lowest mortgage rate, potentially saving you thousands in interest over the life of your loan.

Calum Ross was ranked as the top producing mortgage broker in the country by Canadian Mortgage Professional Magazine. He holds both a B.Comm and MBA in Finance and recently completed a comprehensive Leadership Program at Harvard Business School. Reach him at:

Keep up to date with the latest REIN news and events! Subscribe now:

Stay Connected

All Access

Twitter Feed