When I meet with potential clients, my initial objective is to allow the first meeting to be the opportunity for their questions and concerns to be honestly addressed; without the pressure of what will happen with their entire mortgage objectives in 30 minutes.  The simple reason for this is, it will be impossible to convince them that the largest purchase of their entire life should not be considered extremely carefully. It's respectful to provide that time as a Mortgage Professional.

A topic of discussion that I am sure to address is what factors are considered when assessing your credit score and history. Lenders use a system known as the 'Five C's of Credit' to determine the strength of weakness of a potential client's application.

The Five C's of Credit are:

  1. Character
  2. Capacity
  3. Capital
  4. Collateral 
  5. Conditions

There is no disputing that the stronger the credit of an applicant provides the ability to obtain the lowest rates of financing, obtaining a higher rate does not always suggest that a client should wait to improve their score or that it isn't a good time to purchase or refinance. There are many factors that determine the appropriate timing, for this post, I will focus on credit expectations and the perspective of lenders.

Character

A lending institution heavily considers the payment history you have maintained with your previous and existing credit accounts. Most credit limits for clients is no where close to the amount of money you are requesting of a financial institution for a mortgage. A longstanding history of paying your creditors on time establishes the understanding that protecting your credit is important to the client as an individual. Making it a priority to return what you have borrowed is a strong trait to have and it translates well with lenders.

Capacity

Lenders will compare how much you have borrowed against your income to ensure that you are not over leveraging yourself with consumer debt. I often encourage to obtain three strong credit cards with reputable institutions that do not have extremely high credit limits. Maintaining the will to ensure that your debt remains manageable is a trait that protects you as a client and shows lenders that it is important for you to live within your means. If a client does have access to large amounts of credit, it is within the lenders ability to condition that some accounts be closed to ensure that affordability is considered by the time of closing. If a lender does make a request of closing existing credit accounts that have a balance, they will expect that it be paid in full by the time of closing or simply put - you will not close on your mortgage transaction.

Capital

Many clients do not realize that there is room for negotiation with respect to obtaining mortgage financing, which is usually considered through capital. Allow me to provide an example of two potential clients:

Client A has a credit score of 750 making $80,000 as a teacher. They have a down payment of 5% and are looking for a starter home as they would like to live closer to work. They plan on buying within their budget and living in the property for a while.

Client B has a credit score of 660 making $65,000 as a sales representative. They have a down payment of $150,000 and are also looking for a starter home to live and work from. They also want to live within their budget, however, they have a few late payments on two credit cards from three years ago.

Now both clients may not approach the same type of lending institutions, but they can both obtain mortgage financing. For the purpose of this blog post, I would like to focus on the application of client B. This client may have some previous credit challenges but they have since corrected them and presenting a down payment of $150,000 provides an understanding to a lender that they also have a lot to lose should they default on the mortgage. Client B understands that the lower their mortgage balance and payments are, the less likely they will become house poor. To a lender, this is appealing because many clients with excellent credit scores do not understand that the amount of money requested during a mortgage transaction is substantial. Canada has maintained low default rates due to our conservative lending approaches, so a larger down payment is advised if in any way possible.

Collateral

Lenders are very particular with respect to the property you are purchasing or refinancing. In the event that a borrower defaults on their mortgage, a bank will repossess the mortgaged property and list it for sale. Naturally, the better the location and condition of the property, the less time it may sit on the market. Banks are in the lending business as opposed to the real estate business; meaning, they would rather the mortgage remain in good standing as opposed to having to repossess your home. Although that the objective, repossessions are a part of the business and must be considered prior to the approval of a mortgage. Also, keep in mind that you can be approved for a mortgage and the property of choice be rejected by the lending institution due to internal guidelines or property conditions. A pre-approval does not guarantee interest in a particular property. Your mortgage professional should be equipped to assist you with this throughout the process. 

Conditions

Every lending institution will need to ensure comfort with an applicants reasons for obtaining mortgage financing as well as details regarding the interest rate and loan amount which directly affects affordability. Always keep in mind that underwriters viewing your file are trained to look for fraud and underlying reasons you are applying for a mortgage. They will ask as many questions to ensure their comfort and have the ability to withdraw an financing offer should the details of your application change throughout the process. Honesty is only approach with your mortgage application to avoid potential delays or even legal ramifications. Understand that obtaining an approval does not guarantee a closed transaction. Be sure to be completely honest with your mortgage professional so that they can provide solutions based on the realities of your situation. It is better to understand why you should wait to obtain a mortgage than to lose a deposit or worse scenarios.