The Five C's of Credit: Character
Thanks for checking out the Pinch Blog! To kick things off, over the next few posts we are going to look at the best way to set yourself up to qualify for a mortgage and pull back the curtain on how the application process unfolds. You’ll hear a lot of people tell you that you need a good down payment and a strong credit score to get a mortgage, but that is only the beginning.
Bankers, mortgage specialists, brokers, and credit adjudicators have to look at your full financial picture, and put your application through a series of checks, before they can approve your application.
The first stage of the application is getting to know your financial standing. This stage comes before any consideration of your property details, this is more like a first date with your lender, and they want to get to know you. Specifically, they want to know your character, capital, capacity, credit history, and collateral — simply put, the 5C’s. Let’s start by taking a look at how a bank takes a look at the first C in particular: character.
Before you get alarmed about a bank judging your character, rest assured they are focused on your previous history with finance, residence, and employment. First, they will look at your investment and savings strategy to see if it makes sense for your life stage. If you have been saving regularly over a period of years for your down payment then they will be pleased. In addition, if they can see that you have been focussed on repaying student debt rather than saving then they will also be pleased. The first shows a commitment to saving, and the second shows dedication to repaying debt.
If, however, you are in your early thirties with good income but carry debt and lack savings then they will be concerned. If there is a rational explanation for your situation, like caring for a family member, then tell that to your lender. Remember, they only know what you tell them.
Another part of character is stability, both in employment and residence. The longer you have been with your employer, or been continuously employed in the same industry, the better. Banks look for this because it means you are likely to keep that employment income once you have the mortgage, making repayment more likely.
Stability in residence is not something most people are aware of, but it matters. Banks like to see that you have lived in the same place for a number of years. If you move between apartments then they wonder if there was a reason that you had to keep moving. Again, if there is a rational explanation for you moving around then provide it.
The last component of character is your relationship with that lender. If you have been a client of that bank for years then they will be thrilled to help you with your mortgage. If, however, you do all your banking at CIBC but go into an RBC to do your mortgage then they will wonder why you chose to leave CIBC. Moreover, they will wonder if there is something they do not know about your history with CIBC. This is true for all banks, and there can be a million reasons to change banks, they just want to make sure yours is reasonable.
Your banker will not open your conversation by saying, “let’s talk about your character,” instead they are going to ask you discovery questions while you are talking, so try to answer with this information in mind.
Stay tuned as we cover the other four C’s of your financial picture, and we will tell you what the process looks like from the banker’s side so you have an idea of how this information is used to qualify you for a mortgage.