Qualification and the 5 Cs of credit
The borrower’s qualification process looks at two distinct factors:
- the borrower’s capacity to make mortgage payments
- the borrower’s willingness to make these payments and meet his contractual obligations
The borrower’s capacity and willingness to pay are defined by what are known today as the 5 Cs of credit.
- Capacity – The borrower’s capacity to repay the loan. Using the debt-to-income ratio and a thorough review of the borrower’s payment history, the lender is able to assess the borrower’s capacity to repay the loan.
- Capital – The amount invested in the property by the borrower. The lender may wish to ensure that the borrower assumes a share of the financial risk by injecting his own capital into a property acquisition before asking the lender to commit.
- Character – A general opinion of the borrower’s capacity to repay a loan. The length of time the borrower has been employed (indicated on the loan application and verified by the broker and lender) helps establish the borrower’s job security and is one of the main indicators of the borrower’s capacity to repay a loan.
- Collateral (surety) – Collateral is the security given to the lender as a guarantee for a loan. In the case of a mortgage, this is the property itself: its value, location and characteristics. The security may also come from third parties called guarantors.
- Credit (financial characteristics) – The borrower’s credit history, specifically his repayment history. The borrower’s credit information is essentially the only way for the lender to predict whether the borrower will make payments in the future.
