Why you should follow the 5 C’s of credit
Over the last few years the home financing landscape has changed drastically and being approved for a home loan today is becoming more challenging than it once was. That said, if you keep the age old rules of the “5 C’s of credit” in mind you will already be ahead of the pack.
Character
As soon as a loan application is submitted the lender will run a copy of your credit file and cross match it against the information provided in the loan application. They are confirming and also looking for any differences in your name, address, age, employer, address, any credit concerns (defaults, late payments) and current debts etc. Who are you, what do you do and are you of a good character for a lender.
Capacity
This checks if you have the ability to repay your new loan and any other debts you have in play. To do this you will need to provide evidence of your income (payslips, PAYG Summary, Self-Employed financials, etc). You need to give the lender certainty that you can afford the loan you are applying for. What other debts do you have that may affect your ability to service a new loan? Do you need these debts still or can you reduce your limits etc?
Capital
What type and amount of assets do you have/own? Lenders look for and take into account: Superannuation, home contents, money held in savings accounts/term deposits, cars, boats and/or other assets. If you are just starting out (a First Home Buyer in their early 20’s) you may not have many assets which is understandable, but if you are in your late 40’s or 50’s and have limited assets (without a previous major life event that reduced them) the lender will question why and possibly be concerned that you spend all you earn, hence may not be able to support a new loan.
Collateral
When you are applying for a home loan the lender will use the property being purchased as Security for the loan. This means that while you owe money on the loan you borrowed, the lender will keep the title of the property until the day it is paid off. When taking on a Security the lender will value the property. Will the property type, size, location etc suit the lender? Does the price it values at equate to similar properties that have sold in the area in the past three months?
Conditions
This point is a hard one to gauge how it affects a loan application. Why? It is relates so many factors, a lot that are out of your control and can change overnight. This includes but is not limited to: Australia and the World’s economic conditions, the Lender, interest rates, labour markets, the local area where the Security property is located, employment industry etc.
Lending policies regarding what they will and won’t accept can change weekly if not daily and Lenders that used to assess loan with relative ease can and are taking longer and asking for more information.
Disclaimer Statement: Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product.
Lending Mate™ trading as Free From Financial Worries Pty Ltd (ABN 88 134 812 165), Credit Representative number 442518 is an authorised representative of Connective Credit Services Pty Ltd (ABN: 51 143 651 496), Credit License number 389328.