Understanding

Credit Analysis

The 5 'C' of Analysis to Determine the Strength of a Credit Application

 

Character

A good character is generally viewed as applicants having strong employment stability, residential stability, savings and debt repayment habits. For instance, two or more years with the same employer exemplifies strong employment stability. The two year stability also applies to the applicant's residential status. Lenders will tend to seek reasons for short job and residential tenures. Another indicator that reflect applicant's character is the use of credit utilities. Delinquent credit repayments can potentially jeopardize the application process.

Capital

For purchase of a new or resale home, the Canadian mortgage rules require home buyers to inject a minimum of 5% of the purchase price. Down payments below 20% of the purchase price generally require Mortgage Insurance. The three mortgage insurance providers in Canada are Canadian Mortgage Housing Corporation (CMHC), Genworth Financial Canada and Canada Guaranty. For insured mortgages, mortgage applicants will need to present their last 90 days of bank account transaction history where the down payment is being debited. For conventional (uninsured) mortgages, applicants are required to present last 30 days bank transaction history. This is to ensure all mortgage applicants comply with the Canadian anti-money laundering and anti-terrorist financing guidelines. Own savings for down payment will add strength to the application compared to gifted funds. 

 

 

Capacity

To calculate the strength and ability of mortgage applicants to ensure a comfortable monthly debt obligations towards housing cost and all other monthly debts. Lenders calculate what is called the Total Debt to Service Ratio (TDSR) and Gross Debt to Service Ratio (GDSR). As of October 17, 2016, the Government of Canada Finance Department introduced the 'mortgage stress test' where the TDSR/GDSR calculations is calculated using the 'higher' of the Bank of Canada's benchmark rate or the contract rate. 

 

 
Example:  Debt to Income Ratio Calculation also known as Mortgage Stress Test

 

 

 

 

Credit

Maintaining a clean credit report is very important to lenders as it demonstrates the debt repayment habits. In addition, lenders would like to see repayment history on at least two credit accounts with two years history. maintaining a low credit utilization of credit accounts will also strengthen the credit score known as the beacon. There are two credit reporting companies available in Canada. Equifax and TransUnion. 

Collateral

The house that is being purchased, also known as the subject property, need to be in good condition. Location of the property also plays a factor in the lender's decision if they were to take as collateral. Generally, properties located in major metropolitan areas are more desirable than properties located in small rural areas. This is mainly due to the marketability of the property in the case if the borrower were to face foreclosure

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