18 Jan

5 C’s of Credit to get a Mortgage

Bank

Posted by: Kelly Hudson

Whether you are buying your first home or have been a home owner for years, when you are looking at purchasing a property, finding the best mortgage solution for your specific situation can be an intimidating experience.

Working with a licenced mortgage broker will ease that tension, along with knowing the basics of what lenders are looking for will help you better understand the process.

 The Five C’s of Credit/Mortgages

The five Cs of credit is a system used by lenders to gauge the creditworthiness of potential borrowers. The system weighs five characteristics of the borrower and conditions of the mortgage, attempting to estimate the chance of default and, consequently, the risk of a financial loss for the lender.

Higher Risk = Higher Rates!

Know Your 5 C’s:

Every client has individual mortgage needs when buying a home and my goal is to find a mortgage loan that’s right fit for your situation! The first step in getting the mortgage process started involves understanding what lenders are looking for in order to get mortgage approval.

The approval process is called the Five C’s of Credit and they consist of:

  • Collateral– the property that you are planning to purchase
  • Credit – do you have good credit? Do you have a good history of repayment for all loans?
  • Capacity – Proof of being able to pay for your mortgage with your provable income
  • Capital – How much equity do you have in the property? The borrower’s net worth.
  • Character – The borrower’s willingness to repay the loan and their reliability
  1. Collateral 

    Collateral reflects the strength of the property itself.  Lenders look at if the property is owner occupied (do you live there) or is it a rental dwelling?  Is the property a home, condominium or cottage? Is the property located in a metropolitan neighbourhood or a rural area? Is there a single family living in the home or multiple families? All these factors are taken into consideration by the lender for marketability when rating your property. An appraisal is one of the tools used to assess the “current” value of the property.

BC Property Assessment vs Home Appraisal  

  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 (also called credit history, credit report, credit rating) is the primary measurement factor.  When you borrow money, your repayment history is reported to the credit bureau – this rating is called your credit score.  How do you pay your bills – always on time or sometimes a few days late or not at all, will determine what type of credit rating will apply.  Some other factors that affect your credit rating are if your credit card balance is greater than 25-50% of your credit limit, if any accounts have gone to collection, or if there have been multiple inquiries into your credit.

Solving the Puzzle – 5 factors used in determining your Credit Score

8 Credit Rules You Need to Know, Before You Buy a Home

9½ Steps to Repair & Improve Your Credit

  1. Capacity 

    The most important by far! How are you going to pay for your mortgage? The lender’s main concern is how you intend to repay your mortgage and will consider your income (from all sources) against your monthly expenses.   Proof of income will differ depending on your employment status: salaried, commissioned, self-employed, full time, or part time.  Lenders will determine what types of documents are required to confirm your provable income and how much mortgage you can qualify for. This is represented as TDS Total Debt Service Ratio and GDS Gross Debt Service Ratio.

3 “Rules of Lending” what Banks look at when you apply for a Mortgage in Canada

  1. Capital 

    Capital refers to your personal net worth and how much equity you have in the property.  Where is your down payment coming from? In Canada your minimum down payment is 5% for a “high ratio” insured mortgage* or a “conventional” mortgage with 20% down. The down payment money can come from your own resources or can be gifted from a family member.

* Everything You Wanted to Know about Mortgage Default Insurance

  1. Character 

    Character is a subjective rating and basically reflects a combination of above 4 factors. Your character tells a story to the lender about your individual situation.  Lenders want to know that as a borrower, that you are trustworthy and will meet your payment obligations to them. Lenders will take factors such as length of employment, your tendency to save and use credit responsibly to establish your character and determine whether you are a borrower that they can trust with their mortgage.

The goal is to get a yes with your lender. The Five C’s of credit 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.

There you have it – the 5 C’s that lenders analyze when reviewing a mortgage application. 

If you have any questions or concerns feel free to contact me anytime, I’m here to help!

Mortgages are complicated… BUT they don’t have to be!  Engage an expert.

Give me a call and let’s discuss a mortgage that works for you (not the bank)! 

Kelly Hudson
Mortgage Expert
DLC – Canadian Mortgage Experts
Mobile: 604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com

4 Oct

Mortgage Insurance 101

Bank

Posted by: Kelly Hudson

Mortgage insurance… sounds simple doesn’t it??

For a first-time home buyer, the types of insurance surrounding a mortgage can be confusing, so it’s important to know what insurance covers what.

There are 3 main types of insurance to know about when buying a home.

Mortgage Default Insurance – If you put less than 20% down on a home you are buying, Government rules are you must pay for Mortgage Default Insurance which covers the lender should you default on your mortgage payments.

There are three mortgage default insurers in Canada – Canadian Mortgage & Housing Corp. (CMHC), Genworth or Canada Guaranty) The purchase of this insurance solely benefits the bank/lender.

For more information check out Everything You Wanted to Know about Mortgage Default Insurance

Mortgage Insurance and/or Life Insurance

You’ve just made the biggest purchase of your life: a new home for you and your family.

  • What’s the best way to protect your investment if you die?

Insurance is the answer. But what kind: mortgage insurance or life insurance? 

There are important differences between the two that we’ll examine.

Mortgage Insurance Life Insurance
Tends to be quicker to process. Can take 30-90 days to put into place.
Can be easier to qualify for. With individual owned insurance the medical underwriting is completed up front, so you know what is covered when your policy is approved.
Decreasing benefit – the amount of coverage with mortgage insurance decreases as you pay down the balance each month, while the monthly insurance payments remain the same. If you get coverage for $500K, it stays at $500K until you decide to change it, or your term expires.

Beneficiary is the lender/bank who holds your mortgage. You can designate the beneficiary/beneficiaries.
Mortgage insurance is attached to the outstanding balance on your mortgage. Life insurance is attached to you rather that your debt.
Typically, your mortgage insurance policy pays off the current balance on your mortgage to your lender/bank. The beneficiary(ies) decide what to do with the insurance.  Funds can be used to pay off the mortgage or any other bills (funeral, hospital/home care expenses, living expenses, education etc.).  It’s your money, and you can decide how to use it.
You can cancel anytime i.e. you find an insurance product that suits you better. You can cancel anytime i.e. you find an insurance product that suits you better.
Portability – mortgage broker sold Mortgage Insurance policies are portable. Which means that if you switch lenders or buy a new property, you will be able to transfer your Mortgage Life Insurance to a new property. Make sure you ask your Insurance Provider if the insurance they are recommending is portable.·         Take note that when the bank offers you Mortgage Insurance you will not likely be able to transfer your Mortgage Life Insurance to a new lender or property thereby limiting your future financing options. Completely portable.  Doesn’t matter if you buy a different home or switch lenders/banks, life insurance follows you not your property.

Please note:  Mortgage/Life Insurance is not mandatory to qualify for a mortgage.

You have made the biggest purchase of your life… how do you protect yourself and your family?  Many people say they have life insurance through their work, but is it enough?

  • The question you should be asking is – do you currently have enough life insurance in place right now, equal to your mortgage amount?

Top Benefits of purchasing Mortgage/Life Insurance

  1. Peace of Mind – creates a sense of security that your loved ones will be taken care of if you pass on.
  2. Mortgage Can be Paid Off – whereby any other policies that are held will be able to assist with other needs.
  3. Family can Stay in their Home – if there is the unfortunate life event that is the death of the Mortgage/Life Insurance policy holder, the mortgage can be paid off which will allow the family to stay in their home and not become displaced, causing additional anguish.
  4. The Younger you are, the Less Expensive – Which means that insurance is extremely affordable for a young, and likely, first time home buyer.
  5. Good Health = Coverage for Unexpected Illness Later on – After illness strikes, it is more difficult to acquire life insurance.

Mortgage/Life Insurance is an option that anyone with a mortgage should consider. Ask me about a referral for reputable and credible insurance.

While we’re discussing insurance, there are other types of insurance you need to consider as well…

  • Fire insurance – most lenders will want to see that you have fire insurance in place, prior to funding your mortgage to “protect” their investment.

Additional insurance options:

  • Disability insurance
  • Personal content insurance

Mortgages are complicated… BUT they don’t have to be!  You need to protect your investment by engaging an expert.

Give me a call and let’s discuss a mortgage that works for you (not the bank)!

Kelly Hudson
Mortgage Broker
DLC – Canadian Mortgage Experts
Mobile: 604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com