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

16 Aug

5 GREAT Reasons To Provide a 20% Down Payment when Buying a Home

Canada

Posted by: Kelly Hudson

Home & Cdn CashThere are many challenges that come into play when you’re in the market to buy a home.

Buyers say the number one obstacle to homeownership is saving enough for a down payment, the amount that the buyer provides toward the purchase of their home.

Exactly how much do you need to put down? Assuming you can finance the debt with your current income you can get a mortgage for as little as 5% down PLUS pay for Mortgage Default insurance if you put less than 20% down.

A smart rule of thumb is always try to put a least 20% down.

Although that may be a challenge in Greater Vancouver where the current Vancouver MLS stats indicate an average house price of $1,227,420

  1. Easier to service your debt Putting 20% down reduces the size of your monthly mortgage payment, making you more likely to qualify for and afford, your mortgage. Lenders want to make sure you can service your debt with your current income using 2 rules:
    • Rule #1 – GROSS DEBT SERVICE (GDS) Your monthly housing costs are generally not supposed to exceed 35-39% of your gross monthly income.  Housing costs include – your monthly mortgage payment, property taxes and can include heating.  If you are buying a condo/townhouse with strata property then the GDS will also include ½ of your strata fees.

      Principle + Interest + Taxes (+ 50-100% Strata Fees if applicable)

      Gross Income

      Rule #2 – TOTAL DEBT SERVICE (TDS) Your entire monthly debt payments should not exceed 40-44% of your gross monthly income This includes your housing costs PLUS all other monthly payments (first mortgage, property taxes, maintenance fees, additional financing, car payments, charge accounts, etc.).

      (Principle + Interest + Taxes) + Other Payments 

      Gross Income

  2. A Smaller Monthly Mortgage Payment! You pay LESS!! I’m all about making smaller mortgage payments and having money for the fun stuff in life. More money down means, you borrow less money, which means you will have a smaller mortgage, which means you have smaller, more affordable mortgage payments.
  3. No private mortgage default insurance Putting 20% down allows you to avoid paying for mortgage default insurance.
    • In Canada, mortgage insurance is required federally on high-ratio mortgages (a down payment of less than 20%). This insurance, which protects the bank/lender in case the borrower defaults, gives lenders the flexibility to offer homebuyers with low down payments the same low interest rates they would offer to homebuyers with more equity.
    • Mortgage insurance premiums are based on the amount of the mortgage. The higher the loan-to-value ratio, the higher the premium cost. In other words, the lower your down payment, the more expensive the insurance. This premium may be paid in cash in a lump sum upon closing, it is usually added to the mortgage amount and paid over the length of the mortgage.
    • Canadian Mortgage & Housing Corp. (CMHC) and Genworth Canada provide mortgage default insurance. Click on CMHC or Genworth for the sliding scale, the bigger your down payment the less insurance you pay. Once you hit a 20% down payment, mortgage default insurance is no longer mandatory.
  4. Pay Less Interest over the Life of the Loan You pay less interest with 20% down payment, since you’re putting more money on the house compared to if you put 5% or 10% down.
  5. Instant Equity Building A significant down payment builds instant equity in your home. A 20% down payment immediately puts equity into a home when you purchase it. That down payment gives you some cushion, in case the market takes a downward turn.

Let’s discuss which mortgage down payment works for you NOT the bank!

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