Mortgage Guide....
Please take a few moments to read the following summary as it will help explain the mortgage approval process in Canada. All lenders underwrite and approve mortgage loans using the same criteria and it is important for you to understand this process in order to make an educated decision regarding your mortgage. As your mortgage advisor, my goal is to not only find the best mortgage options available today, but to ensure that you have the tools to succeed tomorrow.
All lenders underwrite mortgages using an approval process called the
"Five C's of Credit" which are:
- Collateral - the property itself
- Credit - the borrower's repayment history for all loans
- Capacity - the borrower's ability to pay
- Capital - the net worth of the borrower including their home equity
- Character - the borrower's willingmess to repay the loan and their reliability
How each application rates in each of these areas will determine which lender will provide financing and more importantly what conditions, rates, and fees will be involved.
Based on our initial conversation, some market research and my personal expertise, I have summarized the strengths and weaknesses of your application in order to illustrate where it would rate in each of the above categories.
| Excellent = 5 | Good = 4 | Average = 3 | Poor = 2 | Very Poor = 1 |
1. Collateral
Collateral reflects the strength of the property itself. All lenders rate an owner occupied, single family residence on a standard city lot in a major metropolitan area as the highest quality. As a property moves further from that description the rating is lowered. A condominium, a rental property, a property in a more rural location or acreage would all be examples of properties that would be rated lower than the standard, primarily due to marketability. The lower the LTV, higher the collateral meaning more downpayment. The higher investment used as downpayment produces a lower LTV which increase the collateral in the property.
| Excellent | (70% and lower LTV) | Notes: |
|
| Good | (80% LTV) | ||
| Average | (90% LTV) | ||
| Poor | (95% LTV) | ||
| Very Poor | (100% LTV) |
2. Credit
When you borrow money from a bank or credit union in Canada, your repayment history is reported to the credit bureau. All Lenders refer to the credit report when considering your 'creditworthiness' before lending to you. If you are late on making a payment it is reported for all future lenders to see. Length of time on the credit bureau, repayment history, and utilization (how close you are to the limits on your credit cards) are all taken into account when determining your credit rating.
| Excellent | (Beacon score = 850+) | Notes: *Currently 5 months in arrears with credit cards. *2 months past due with mortgage. *Unpaid collections. |
|
| Good | (Beacon score = 750-849) | ||
| Average | (Beacon score = 650-749) | ||
| Poor | (Beacon score = 600-649) | ||
| Very Poor | (Beacon score = 550-599) |
3.Capacity
When Lenders talk about capacity, they are referring to your ability to manage the mortgage payment based on your proven household income as well as how much other debt you have. They consider your income, the nature of that income (full-time, part-time, etc) and whether you are able to prove that income. Non-income Qualification (NIQ) mortgages are available where income does not have to proven with documentation. This is good news when you may have difficulty proving income in the traditional way but would score against you in terms of a lender's rating your capacity.
| Excellent | Notes: *Self-employed for 10 months. *Has not filed income taxes for the past 2 years. |
|
| Good | ||
| Average | ||
| Poor | ||
| Very Poor |
4. Capital
Capital refers to your personal net worth and how much equity you have in the property. Equity is the difference between the current market value of your home and all outstanding mortgages against the property. Although 100% (no money down) mortgages are widely available these days they represent the least amount of capital and therefore a greater risk to lenders.
| Excellent | Notes: *Refinancing to 85% LTV *No other assets |
|
| Good | ||
| Average | ||
| Poor | ||
| Very Poor |
5. Character
Character is the most subjective rating but reflects a combination of all of the above as well as job stability, net worth, bankruptcies, and payment obligations such as child support. Remember Lenders do not know you personally and therefore rely on the documentation that is available to them.
| Excellent | Notes: *Average Character score |
|
| Good | ||
| Average | ||
| Poor | ||
| Very Poor |
Your Score
In order to determine how your mortgage application would be rated by lenders, score yourself as follows:
| Excellent = 5 | Good = 4 | Average = 3 | Poor = 2 | Very Poor = 1 |
Now enter your score in each of the 5 categories:
| Collateral: | |
| Credit: | |
| Capacity: | |
| Capital: | |
| Character: | |
| Total Score: |
Your total score indicates type of financing that would be available to you:
| Score | Interest Rate (For 1st Mortgage - Call if 2nd) |
Fees |
| >18 | Bank posted rates or less | Less than $300 (CMHC may apply) |
| 16-18 | Bank posted rates | Less than $1% (CMHC may apply) |
| summarized the strengths and weaknesses of your application in order to illustrate where it would |
Bank posted rates plus up to 2.0% | Up to 2% |
| 10.0-13 | Bank posted rates plus up to 5.0% | Up to 5% |
| <10 | Financing is likely unavailable | |