What Are the Five Cs of Credit?
The five Cs of credit is a set of criteria used by lenders to gauge the creditworthiness of potential borrowers. This type of approach weighs five different characteristics of potential borrowers and conditions of the loan, to help predict the chance of potential default and overall risk or loss for the lender. The Five Cs are: Collateral, Credit, Capacity, Capital and Character.
Ownest’s Software Automatically Calculates the Five Cs
Ownest’s advanced proprietary software automatically calculates a borrower’s credit score using the Five Cs of Credit and summarizes the information in an easy-to-read stoplight snapshot (green, yellow, red rating system). This data empowers our affiliate and lender partners with key insight and visibility of the borrower’s overall credit profile – faster and more accurately than any other software on the market – so you know where you’ll get the best return for your sales efforts.
Why is it Important to Use the Five Cs of Credit?
Evaluating a borrower’s creditworthiness based on the Five Cs of Credit is important because it gives the lender a better overall picture of the borrower and their ability to pay off the loan. It also takes into consideration the more “personal” side of financing by considering the borrower’s character, as opposed to simply looking at past credit history and collateral. For example, if the credit check reports a default payment, it could have been due to unique or rare circumstances, such as an illness or divorce. These types of questions will help lenders understand the borrower’s credit – looking back to the credit history and looking forward to the client’s future capacity.
On June 4, 2020, CMHC announced changes to their underwriting criteria, which will impact sales in some parts of the new home sector. How does this affect home builders, realtors, mortgage brokers – and home buyers?
What are the changes?
- Credit score requirement increasing from 600 to 680 Beacon;
- Flex down mortgages are no longer available (no more zero down mortgages);
- Stricter Debt Servicing Requirements.
When do these changes take effect?
Why are they Changing the Criteria?
- The COVID-19 pandemic, related job losses, business closures and a drop in immigration are adversely impacting Canada’s housing market.
- CMHC states that these actions will protect home buyers and reduce government and taxpayer risk while stabilizing the housing market.
What do these Changes Mean on a Practical Level?
- If you have deals in the pipeline, get them to apply for a mortgage NOW. Clients will need to be approved by the lender and insurer (CMHC) prior to July 1st in order to qualify under old rules. After July 2020, there will be more restrictive requirements for credit and debt servicing.
- For example: For a purchase of a $350,000 house with 5% down the requirement for income is $73,571.13, after the changes the requirement will change to $81,979.26. This will have a significant impact on income requirement.
What can you do to assist your buyers using CMHC?
- Any clients with lower credit scores, unsure of their direction should firm up purchasing now.
- Any clients with a little extra debt with the requirement of more flexible guidelines should firm up agreements now.
- Try to secure new home upgrades as soon as possible to avoid big material changes that require re-approval closer to possession as it may cause an issue.
It is important to note that this is not a directive from the Ministry of Finance, so Canada’s private mortgage insurers such as Genworth and Canada Guaranty are not adopting the new mortgage rules.
Ownest is Here to Help
Ownest’s team of in-house mortgage experts are second-to-none and work with a large network of preferred lenders.
- We will put in the extra hours necessary to ensure your clients’ needs are met.
- Any offers submitted where approvals from lenders are obtained, we will ensure CMHC or other insurer approval is obtained;
- Wherever possible, we will work with lenders that don’t require CMHC or other insurer approval after financing had already been approved, to help ensure your client has approval upon possession (some banks require resubmission closer to possession).
If you need advice or would like us to help you navigate the changing landscape of mortgages, we invite you to contact us and we’ll be happy to help.