The Five C's of Credit

This will be a short review of one of the fundamental measuring sticks of mortgage applications and their success rate; the Five C's, in no particular order.

Before we begin, I myself do not hit all 5 C's so if you feel a bit frustrated about the difficulties in finding a house or mortgage in your price range, I hear you. The US housing crisis of 10 years ago continues to have trickle effects in Canada as lenders continue to require higher and higher thresholds to qualify for real estate while real estate itself continues to say 'can't hear you, i'm too high above your price range'.

THE FIVE C'S

It says here you are a professional hockey player?
Anything other than the sweater as proof?

Character - some say this is the most important C of them all yet others will repeat that old poker proverb of 'money talks, bullshit walks' when it comes to applying for a loan. This C ties in with the last C (credit) as huge factors in determining whether a lender is willing to take a financial chance on you for at least the next five years.

The Solution - Talk the talk. Learn from your mistakes and create the story that makes the lender believe that you are a person of honor and high credit. Show them that letter of reference from your long-time employer. Say you are personal friends of George Clooney, then prove it. Might help, might not. Depends if they've seen Leatherheads.

There's a slight problem with the foundation...

Conditions - what are the conditions of the economy right now, or even the house? Are you planning on
renovating the house to make it more sellable? Are you working in a field who's employment security is tenuous at best, like you are a middle manager/salesman for Blackberry phones? Is your house on the site of an active volcano or ancient Indian burial ground? Was it once a grow op? While some of these may feel intangible, there is some merit to a lender to discovering if there are any warning signals that the borrower may not be able to pay their mortgage.

The Solution - Due diligence. Hey, it's one thing to buy a house built on an ancient Indian burial ground without knowing about it, it's another to do so willingly. If that house has been boarded up for three years, find out why. If it says roomy and airy and you find out it has no roof, walk away. I once had a neighbour who bought a house associated with drug pushers; seven years after purchase someone showed up at his door threatening to beat the shit out of him if he didn't tell him where the ex-owner was. True story.

I once went to the bathroom at
this place on Wall Street.

Capacity - how are you planning on paying off this mortgage? Can you continue to pay this mortgage, heat the home, feed yourself and make your obligations to the lender? No lender wants to be associated with one of those 'man discovered dead in his home after 8 months' type stories. Not only is that mortgage in default, the resulting red flag in attempting to resell that house will in all likelihood be a long and drawn out process resulting in no profits to be made by the lender.

The Solution - develop a reasonable budget detailing your income and your expenses. Factor in property taxes and utilities, something that is often forgotten by first time home owners who are transitioning from renting. Consider those extra purchases like perhaps a lawn mower or washer/dryer. Best to show to the lender that you have put reasonable consideration into your financial picture and your ability to pay your mortgage.

Yes, it's durable, but is it resellable?

Collateral - In other words, what do you bring to the deal? What happens if this all goes sideways and you lose your house in a poker game and the new owner refused to pay your mortgage? All lenders look for evidence of some type of material worth you are bringing to the application. It could be vehicles, stocks, RRSP's or even the amount of the down payment as 'gifted' by your parents. Be prepared to present evidence of at least 3 months of having funds high enough to cover the down payment if they are your own.

The Solution - Buy low, sell high (or estimate high). If you bought that car for $8500, that's at least a $9000 vehicle. Newer vehicles resale value are easier to assess online so don't try to tell your lender than $40,000 truck has $20,000 worth of chrome upgrades added to it. Be prepared.




Credit - How is your credit? Have you proven yourself to be able to pay student loans, auto loans, credit cards on time? Did your Consumer Education Teacher back in high school do a good job in preparing you for this economic necessity to real estate (in)dependence? Not blaming Mr. B but according to my credit history; No.
All lenders require borrowers to submit to a credit check. Your name is run through a database of financial history to the lender a 'score' of how you are doing, paying bills wise. Sometimes, this number is all it will take for you to be disqualified from a mortgage application.

I said a SMALL credit card.

The Solution - Time. Not the answer you want to hear when you are already redesigning the living room of that house that is 'just perfect'. All you can do is make payments, catch up on any discrepancies that your lender will inform you of and in what seems like opposite world, apply for small, low limit credit cards and make the monthly payments. If you have a recent bankruptcy, look to be waiting on average 7 years until you seriously are able to apply for anything that doesn't come with wheels attached to it. Consolidation loans or proposals the same thing. You are going to be faced with a financial 'time out' until your ship has righted itself.

And you know what, with the amount of talk being spent on 'real estate bubbles' and 'market re-corrections' maybe renting for another year isn't that big of a deal. Keep watching your real estate guides and you may see a natural correction as to the prices of houses that don't sell and those that do. Let your broker help you find a house in a comfortable price range for your situation or at the very least find a comfortable price range before you start looking and deciding on houses that you will not be able to afford.
Why set yourself up for disappointment from a rejected mortgage application?


Other questions you might want to see answered on this highly public yet very candid forum? Just let me know in the comments below or visit my website here.