Five Cs of Credit

If you’ve never owned a home, figuring out where to start can feel a little overwhelming.

Over the last week I’ve talked with two couples who have decided they would like to buy.

The conversations were a little different. One couple has been together for almost two years, but live in different communities; the second couple has been married for many years, but never owned a home.

Neither couple had any idea where to start and what they needed to organize.

For the young couple starting out, the first thing I suggested was having a heart-to-heart conversation — full financial disclosure — discussing what they earned, owned, and owed.

I suggested they talk specifically about what type of home they wanted and how much they were comfortable paying for a monthly mortgage payment. Which area of Kelowna did they want to live in?

They also needed to talk about how they would cover house-related expenses. Would they be merging finances completely? Would they be splitting everything 50-50?

My conversation with the married couple was slightly different. Their finances were already joint and there were no financial secrets. Their wish list is simple. They want a small home with a yard for a cherry tree and room for a small garden.

From there, the conversations were pretty similar. We talked about whether they were ready to apply now, or whether they have homework to do first.

With both couples, I reviewed their current situations to see how they met the basic criteria that lenders look at.

There are five basics that lenders look at when considering mortgage applications. These are often spelled out as The Five Cs of Credit:

  • character
  • capacity
  • capital
  • collateral
  • conditions


Lenders review your credit history to determine your credit worthiness. They look at how you have handled credit in the past. Have you made all your payments on time? Have you demonstrated that you use credit responsibly and pay your debts as agreed?

To buy a home, you need to have established at least two different credit facilities. These can include credit cards, vehicle loans, or lines of credit. Newer cell phone accounts also report on your credit bureau and will also be considered.

If you do have credit cards or lines of credit, use them regularly and either pay them in full or try to keep them at balances lower than their limits. This shows that you use your available credit responsibly.

If you have battled with a creditor in the past and taken a stand and not paid – this may come back to bite you. If you have done this and subsequently paid it in full, keep your receipts in case your credit report was not updated correctly.

This can sometimes make or break a mortgage application.


Lenders assess your ability to repay your mortgage. They look at your salary and employment history, as well as any other outstanding debts you have.

Long-term stable employment is considered a strength; if you job-hop on a regular basis lenders may wonder as to whether it is your choice or if you have troubles holding a steady job.

If you are thinking about changing jobs prior to buying a home (unless you are moving for a new position which is a different scenario), consider staying put until you are in your new home. A probation period at a new job is something else that can derail your application.


Capital refers to your down payment. Have you saved diligently? Are you using gifted funds? As a first-time homebuyer will you be pulling money from your RRSPs?

In theory, the more you put down toward your purchase the less risk there is to the lender.

Demonstrating that you have saved your down payment over time speaks to your character as well. This is something that lenders like to see. If an application is a little weak in one area, but you have a significant down payment, this can sometimes mean the difference between an approval and a decline.


Collateral refers to the home you are buying. Lenders want to make sure they are financing a house that is in average or better condition.

When you speak to your mortgage broker or banker and get a pre-approval in place, it is important to know that this approval is still subject to the lender approving the property you choose. Micro condos or homes can also be challenging.

Former grow-ops or homes that are torn apart are incredibly difficult to finance. Some lenders will only consider certain communities or have restrictions on the types of properties they will look at.

When working on your pre-approval, make sure you discuss the type of home you are looking for so your finance person can choose the right type of lender for you.


Conditions refer to the terms of the mortgage itself. As an example, if your credit history has a few bumps, you may not qualify for a mortgage with an A lender, but with enough down payment, you will qualify with a B lender.

If your credit score falls between 580 and 680, there are lenders who will still approve you for a mortgage, but at a slightly lower amount.

The size of your down payment also affects your mortgage conditions. If you have less than 20 per cent down, your mortgage will be insured and will need to be amortized over 25 years or less. If you have more than 20 per cent down, several lenders offer 30 or 35 year amortizations.


If you are starting to think about buying a home, I suggest you reach out to a mortgage professional for a review of your personal situation. You may be close to being ready, and preparation may mean organizing your documents and getting a preapproval in place.

Preparation may mean you need a little time before you are ready to buy. This can mean developing a plan to get you where you need to be. If there are issues with your credit history, you will need time to rebuild your credit. You may need to save your down payment.

Don’t be afraid to ask questions – it’s important to understand how all these pieces fit together.

Buying a home is the biggest financial commitment most people make, and it’s important that you go into the process well prepared.


Creating your dream home

Having troubles finding your dream home? Are the houses in your price range looking a little dated?

If you find a home in your preferred neighbourhood that has the features you want, but needs a little updating, you may want to think about a Purchase Plus Improvements mortgage.

This option is designed for people who wish to purchase a home that may require some immediate upgrades:

  • updated electrical service
  • sewer hookup
  • a new roof
  • central air
  • a new furnace
  • new siding
  • eaves
  • soffits
  • fascia
  • doors
  • windows
  • a new kitchen
  • carpeting
  • or any other renovation that would increase the value of the home. 

It is important to know that this program covers permanent updates to the home, but cannot be used for moveable assets such as appliances. This can be a great solution if you find a house you love but realize that it will take some time to save for any renovations that you want to do.

Here’s how it works. Let’s assume that you have a five per cent down payment. Before the mortgage financing is finalized, you will collect written quotes for the repairs or improvements to be done.

When the application for financing is submitted, the request is made for 95 per cent of the purchase price plus 95 per cent of the cost to complete the improvements.

It is important to know that the lender will hold-back the improvement portion of the mortgage until the work has been completed and inspected, normally within 30-60 days of closing.

Once the work has been completed, the lender will advance the balance of the funds and the contractor can be paid.

This means that you will need to find a way to cover the cost of the renovations temporarily, or work with a contractor who is willing to be paid at the end of the project. Some clients use a credit line to cover the costs until the mortgage funds are released.

What does this mean? Let me give you an example, with the client putting five per cent down:

Purchase price:                $400,000 X 95% = $380,000

Cost of improvements:     $40,000 X 95% = $38,000

Total mortgage:                $440,000 X 95% = $418,000

An application is made for a mortgage in the amount of $418,000, which represents 95 per cent of the purchase price plus 95 per cent of the improvements.

On the closing date, the mortgage advanced to complete the purchase is $380,000 plus the original five per cent from the purchaser’s down payment ($20,000), which provides sufficient funds to complete the purchase of $400,000.

The seller is paid in full and the house is transferred in to the name of the purchaser.

After closing, the contractor completes the improvements (normally within 30-60 days after the closing) and the lender advances the hold-back of $38,000.The purchaser pays the additional five per cent of the cost of the improvements ($2,000) and the $40,000 owed to the contractor can be paid.  

Last summer, I worked with clients who bought a rural property. When the septic inspection was done, they were told that the system was on its last legs.They made the decision to use a Purchase Plus Improvements mortgage and replaced the system before they ran into difficulties.

I’ve also work with clients who used the program for cosmetic upgrades.They renovated their kitchen and bathrooms and changed out all of the flooring.They essentially moved in to a brand new home in the area they wanted to live.

The appraisal at the end of their project showed an increase in value of almost $75,000 based on $35,000 worth of improvements they had done.

With this program, purchasers are happy because they have done extensive improvements to their homes with a minimal cash outlay (the balance was financed with their mortgage).

In both cases they get to enjoy an updated home without scrimping and saving to come up with the funds for improvements.

Home-buying basics

Mortgage pre-qualification – more important than ever

As we head into the spring market, I think it’s important to revisit the basics of the home-buying process.

Whether you are a first-time home buyer, have purchased a home in the past, or worked with a mortgage professional last fall before the rules changed, I strongly recommend you reconnect with your mortgage professional before you go home shopping.

It is a good idea to meet with your mortgage professional to complete (or review) your application and determine how much you are qualified to borrow under the new guidelines. This will determine the price range you should be considering.

Your mortgage professional will outline how much you need to have on hand to cover your down payment and closing costs.  

To complete an application, you will need to have the following information:

  • personal data such as your legal name, birthdate, and social insurance number
  • home address and employment information
  • a description of your assets that includes what you will use for your down payment
  • a list of your outstanding debts (credit cards, loans, etc).

Your mortgage professional will review your credit report. Your credit report provides a history of how you manage your finances and is a key factor that potential lenders review when considering your application.

You will also be asked for confirmation of the information that you have provided. You will need to provide documentation such as:

  • bank statements
  • tax returns
  • letter from your employer
  • current pay stubs.

It is helpful to start gathering this information ahead of time to avoid last-minute stress.

You will be required to show that you have at least 6.5 per cent of the purchase price of your home set aside to cover your minimum down payment and closing costs.

The minimum down payment required to purchase a primary residence is five per cent (for purchases up to $500,000). Over this amount, the minimum down payment required changes to five per cent up to $500,000 and 10 per cent of the balance over $500,000.

The more you are able to put down toward your purchase, the less interest you will pay over the long term.

If you are putting down less than 20 per cent of the purchase price, lenders require default insurance. You may hear this referred to as CMHC insurance.

The purpose of this insurance is to protect the lender in the event that you default on your mortgage payments. It is a one-time up front cost that can be added to your mortgage.

It is calculated as a percentage of the amount you borrow and is based on a sliding scale – the more you put down, the lower the percentage that is charged. 

In some remote areas, lenders may require default insurance even if you put down more than 20 per cent.

Your down payment ideally comes from your own savings.

If you have invested in RRSPs (provided they are not considered locked in), you may be able to take advantage of the Home Buyers Plan and use them as your down payment.

Your down payment may also come from an immediate family member.

Closing costs include items such as:

  • an appraisal
  • home inspection,
  • title insurance
  • property transfer taxes
  • legal fees.

Depending on your particular circumstances, an appraisal may not always be necessary. As a first-time buyer, you may not have to pay property transfer tax.  

Your mortgage professional can give you an idea of what these costs are in your particular area. It is a good idea to use a checklist to keep track of your estimates for these expenses, to ensure you have enough money set aside to cover them.

Once you have completed an application and demonstrated that you have your down payment, your mortgage professional will submit an application to determine if you are pre-qualified.

You will find out the maximum amount you are qualified for, and most lenders will issue a 120 day rate guarantee. This rate guarantee means that even if rates go up while you are shopping, your mortgage will be at the pre-approved rate provided it closes within the 120 day period.  

It is important to understand that even though you are considered pre-approved for a mortgage, final approval is still subject to the property you buy being considered suitable by the lender.

As well, you must be able to satisfy the lender’s requirements for appropriate documentation.

It is important to consider your lifestyle and spending habits — just because you are pre-approved to a certain amount does not mean it will be comfortable to carry that particular mortgage payment.

Practice making the higher mortgage payment and additional expenses of owning your own home for a few months. This will give you a good idea of whether you want to commit to the maximum amount, or perhaps scale back a little to allow for more discretionary spending.

Knowing the amount you are pre-approved for will help guide your search as you move to the fun part of the process – shopping for your new home.

Make sure you leave room in the budget for snow shovels.


The best rate is...

“What’s your best rate? I saw on-line that I can get 2.89 per cent for five years.”

Many times this is the first question clients open with. In the past, this was a relatively simple question to answer.

Changes to mortgage rules introduced in October 2016 have made this question far more challenging.

Most news stories and conversations have focused on qualification guidelines, and how the new rules affect clients’ borrowing power.  

One aspect of the changes that has been overlooked is the new definition of which mortgages are considered insurable.

Insurable mortgages are those eligible for default insurance. Default insurance, which is most commonly referred to as CMHC insurance (provided in Canada by CMHC, Genworth, and Canada Guaranty), protects the lender in case the mortgage goes in to foreclosure.

With the changes introduced in October 2016, the definition of which mortgages are insurable changed.

At this time, rental properties are no longer considered insurable. Refinances are no longer insurable.

How does this tie in to the best-rate question?

Prior to October 2016, I had two rate sheets to reference: 

  • one sheet for high-ratio (insured with less than 20 per cent down payment) mortgages
  • a second sheet for conventional mortgages (20 per cent or more down payment).

Today, I have three categories of rates. I have six rate sheets of lenders and rate categories to go through to find a suitable fit, depending on the client’s situation.

Lenders offer different rates for insured mortgages, insurable mortgages, and for rentals and refinances.

To add to this complexity, many lenders are offering a tiered rate structure within the insurable and rental/refinance rate brackets, depending on how much equity the client will have in the property.

Before I even consider quoting a rate, I need to ask my client a series of questions. This can be frustrating for clients who haven’t been through a mortgage application in the last few years.

Because rental properties and refinances are no longer insurable, there is greater risk to the lenders in the event that things go sideways with the mortgage. In most cases, these rates are now priced slightly higher to help mitigate that risk.

Most challenging to explain to clients is that when they are putting 20 per cent or more down, their rates are slightly higher than those offered to clients who have to pay mandatory default insurance.

It seems counter-intuitive to think that people putting more money down have to pay a higher interest rate than clients making a minimum down payment.

Making it even more complex, some lenders no longer offer certain mortgage products. For instance, trying to find a competitive rate for clients looking to refinance a rental property last week proved to be very challenging.

Their current mortgage holder no longer offers mortgages on rental properties, which means they will have to pay a penalty to move to a new lender that does offer refinances on rentals.

Finding a low rate is obviously important. With the changing mortgage environment it is more important than ever to understand the fine print of different mortgage products. 

When you are looking for a new mortgage, as important as the rate question are the following:

  • What are the prepayment privileges?
  • Is this mortgage portable?
  • Is this mortgage assumable?
  • How does this lender calculate early payout penalties?

As we move forward and adjust to the new mortgage guidelines, lenders are fine-tuning their products to remain competitive and offer clients a wide range of options.

Your mortgage professional will be able to offer you advice and guidance as to the best fit for your situation.

More The Mortgage Gal articles

About the Author

Laurie Baird and Tracy Head are mortgage brokers with Verico Complete Mortgage Services. Together they have over 45 years of experience in the mortgage industry.

As mortgage brokers, Laurie and Tracy spend time getting to know the people they work with and help them understand the mortgage process. They support their clients before, during, and after a home purchase.

Laurie and Tracy are able to offer their clients advice and options. With access to over 40 different lenders, Laurie and Tracy are able to match the needs of their clients with the right mortgage package. They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit:

Visit Laurie's blog at: https://www.okanaganmortgages.com/blog

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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