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.


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About the Author

Tracy Head and Laurie Baird help busy families find mortgage solutions. Together they have more than 45 years of experience in the mortgage industry.

With today’s increasingly complicated mortgage rules, Tracy and Laurie spend time getting to know the people they work with and help them to better understand the mortgage process. They support their clients before, during, and after their mortgage is in place.

Tracy and Laurie work closely with their clients, offering advice and options. With access to more than 40 different lenders, Tracy and Laurie are able to assist with residential, commercial, and reverse mortgages in order 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 http://www.okanaganmortgages.com

Visit their 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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