The rocky housing market and the rise in interest rates in North America have created a wave of anxiousness amongst potential buyers.
Will I be able to afford my dream house?
Will I secure a decent mortgage?
With all these questions arising in our minds, it’s best to know what the lenders consider before extending the necessary funds to you.
The lenders use the following 5 C’s of Credit to gauge your creditworthiness and whether or not you will default on your mortgage:
- Credit History –
A lot depends on your and the co-applicant’s credit score. A score of 680 and above is generally considered a benchmark of good credit by the lenders. It is ideal if you have a minimum of 2 years of credit history and 2 lines of credit in your name. This is essentially how your overall score is broken down:
2. Collateral –
Collateral is the property that you’re buying and its value. In case of a mortgage, the collateral is your house that a lender can secure in case you fail to make payments on time. The lender will estimate the fair market value of your property before issuing you the loan. This can be estimated by the amount that other properties in the neighbourhood are going for and by the structure of the house itself.
3. Capacity –
The capacity of the borrower is his/her ability to repay the loan and is determined by the borrower’s sources of income, whether employed or self-employed. Essentially, the banks need to know if you earn enough vis-a-vis your monthly installment towards the house.
- Capital –
Capital is the amount that the borrower has invested in the property which essentially is the down payment towards the house. The lenders typically are comfortable extending a loan if the borrower has 20 to 35% stake in the property and the money has a clear and identifiable trail. However, if you don’t have even 20% down payment available, there are many lenders who will be able to work with you with just 5% down. In that case, you may have to incur insurance-related expenses.
- Character –
The final point that can seal the deal is the borrower’s character. It is the borrower’s reputation and creditworthiness. Here, the lenders look at different factors like consistency at your workplace, whether you’ve been in the same field/industry for a long time, your propensity to save and utilize credit responsibly.
These are the 5 C’s of credit that are taken into consideration by lenders and underwriters while sanctioning a loan. It is critical that you know and understand them thoroughly. It will not only help you make well-informed financial decisions in your life but also ensure that you land that mortgage when you decide on buying your dream house!
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