5 Cs of Credit
Understanding credit qualification
At The Mortgage Centre, we strive to provide you with the right financial solution, at the right time – including the potential offered by credit products. But only we know whether a credit product, such as a loan, is suitable for you. And once we decide that it is, the next step is to determine whether you’ll qualify.
Lenders use the 5 Cs of credit (capacity, capital, collateral, credit history and character) as part of their underwriting process.
By understanding these components of credit, we have the ability to assess the likelihood of you qualifying for a loan – which can be a real time-saver down the road.
Think of the 5 Cs as a tool for us to understand your credit viability. Because at the end of the day, we want to ensure we’re able to recommend credit products with confidence.
At The Mortgage Centre, we strive to provide you with the right financial solution, at the right time – including the potential offered by credit products. But only we know whether a credit product, such as a loan, is suitable for you. And once we decide that it is, the next step is to determine whether you’ll qualify.
Lenders use the 5 Cs of credit (capacity, capital, collateral, credit history and character) as part of their underwriting process.
By understanding these components of credit, we have the ability to assess the likelihood of you qualifying for a loan – which can be a real time-saver down the road.
Think of the 5 Cs as a tool for us to understand your credit viability. Because at the end of the day, we want to ensure we’re able to recommend credit products with confidence.
Determine your capacity
Can you handle the debt?
Capacity is the mathematical calculation of a person’s ability to repay debt. It’s based on your Total Debt Service Ratio (TDSR). Here is a quick way to calculate TDSR:
Capacity is the mathematical calculation of a person’s ability to repay debt. It’s based on your Total Debt Service Ratio (TDSR). Here is a quick way to calculate TDSR:
Assessing your capital
Do you have sufficient financial resources?
Capital, or net worth, demonstrates a person’s ability to manage their finances and accumulate assets while repaying their debt obligations. It is calculated by subtracting an individual’s liabilities from their assets. Net worth reassures lenders that an individual has means other than their monthly income to repay debt.
Generally, minimum net worth requirements depend on the amount of the loan. Using our example of an individual applying for a $100,000 investment loan, the applicant’s net worth is greater than the minimum net worth requirement (1.5 x the loan amount) and therefore, is more likely to qualify. Here’s an illustration:
Capital, or net worth, demonstrates a person’s ability to manage their finances and accumulate assets while repaying their debt obligations. It is calculated by subtracting an individual’s liabilities from their assets. Net worth reassures lenders that an individual has means other than their monthly income to repay debt.
Generally, minimum net worth requirements depend on the amount of the loan. Using our example of an individual applying for a $100,000 investment loan, the applicant’s net worth is greater than the minimum net worth requirement (1.5 x the loan amount) and therefore, is more likely to qualify. Here’s an illustration:
Looking at your collateral and reviewing your credit history
Can your assets back your debt?
Collateral is a pledge of property or other assets that an individual uses as security against borrowed monies. The relationship between the value of these assets and the amount of the loan is called the loan-to-value ratio (LTV) and it’s expressed as a percentage:
Collateral is a pledge of property or other assets that an individual uses as security against borrowed monies. The relationship between the value of these assets and the amount of the loan is called the loan-to-value ratio (LTV) and it’s expressed as a percentage:
What's your character
Do you have good habits?
Underwriters also assess the character of an applicant, which is based on a number of factors. This includes the stability of their career and residence and their willingness to provide complete and accurate information.
Underwriters also assess the character of an applicant, which is based on a number of factors. This includes the stability of their career and residence and their willingness to provide complete and accurate information.
