If you’re thinking about buying a home, one of the smartest first steps is getting pre-approved for a mortgage. But what exactly do lenders evaluate before approving your application
Mortgage professionals rely on the “Five Cs of Credit”- a framework used to assess your
financial health and readiness for a mortgage. By understanding these factors, you can prepare more effectively and increase your chances of approval, often with better rates and terms.
Here’s what each “C” means and how you can strengthen your application:
1. Character: Are You a Responsible Borrower?
This isn’t about your personality – it’s about your financial reliability. Lenders want to know if you’re likely to repay the mortgage based on your past actions and current situation.
To assess Character lenders look at:
- Your employment stability (How long have you been at your job?)
- Educational background or training (Does your field show long-term potential?)
- Your residency history (Have you remained in the same area or moved frequently?)
- Self-employment or business experience
These details help lenders evaluate your financial character. A stable job and consistent residence history can tip the scale in your favour.
✅ Tip: Fill out your mortgage application completely and accurately – lenders gather much of this information from your submission.
2. Capital: How Much Are You Contributing?
Capital refers to your down payment and the amount of your own money you’re putting toward the home. The larger your down payment, the lower the risk for lenders which often means better mortgage options for you.Lenders also examine your savings habits and net worth.
To assess Capital lenders look at:
- Personal savings and investment accounts
- RRSPs and TFSAs
- Vehicles you own
- Other property or valuable assets
- Showing that you can save and build assets demonstrates financial discipline and stability.
✅ Tip: Aim to save between 5% and 20% of the home’s value for your down payment. A higher contribution can make your application stand out.
3. Capacity: Can You Afford the Mortgage Payments?
Your ability to make monthly payments is one of the most important considerations. Lenders need to confirm that your income can comfortably support your mortgage.
To assess Capacity lenders look at:
- Your gross (before-tax) income
- Monthly debt obligations (credit cards, car payments, loans)
- Debt service ratios (how much of your income goes to debts)
- Most lenders follow strict guidelines. For example, your Gross Debt Service (GDS) ratio should generally stay under 39%, while your Total Debt Service (TDS) ratio shouldn’t exceed 44%.
✅ Tip: Pay down debts before applying to improve your ratios – and potentially qualify for a larger mortgage.
4. Credit: What Does Your Credit History Reveal?
Lenders review your credit score and credit report to see how you’ve handled debt in the past. A strong credit history reassures them that you’re likely to manage your mortgage responsibly.
To assess Credit history lenders look at:
- Your credit score
- Payment history (Are you paying on time?)
- Credit utilization (How much of your credit limits are you using?)
- Length of credit history
- If you’ve had missed payments, collections, or bankruptcies, that could affect your chances – but the good news is that credit can improve over time with consistent effort.
✅ Tip: Review your credit report before applying and correct any errors. Pay down high balances and avoid new credit inquiries during the pre-approval process. Keep your credit utilization below 30% of your available credit limit.
5. Collateral: What Property Is Backing the Loan?
In a mortgage, the home you’re buying serves as the collateral. If you can’t make your payments, the lender can sell the property to recover the loan.
To assess Collateral lenders look at :
- The appraised value of the home
- The type of property (single-family home, condo, duplex, etc.)
- Its condition and location
- A well-maintained property in a desirable area strengthens your application, as it presents less risk for the lender.
✅ Tip: Choosing a solid property in a stable neighbourhood helps you qualify more easily and may even increase your borrowing power.
Final Thoughts: Set Yourself Up for Success
Getting pre-approved is a key step in your homeownership journey. When you understand the Five Cs of Credit, you gain a powerful advantage. By preparing in these five areas, you’ll put yourself in a strong position – not just to get approved, but to secure a mortgage that truly fits your goals.