An important part of the presentation of your loan request to your lender is the Ownership and Sponsorship discussion. It’s an opportunity to present your financial capacity, credit worthiness, real estate experience and expertise. Why is this important? Your relative creditworthiness is a recognized industry indicator of the likelihood of your default. Your lender needs to develop comfort that you will successfully own and operate the property, and repay the loan.
From a Banker’s perspective, lending money has never been difficult. Getting it back can sometimes be challenging though!Let’s take a closer look at the 5 C’s of Lending. Its both a qualitative and quantitative assessment method to evaluate you, the borrower.
For the most part this is a review of your credit history. Your track record at repaying debts is analyzed, by reviewing your Credit Score, as provided by one of several Credit Bureaus who compile such information. A numeric credit score is derived, most often referred to as a FICO or Beacon score, from the information on your Credit Bureau Report. In a post to follow, we will dig deeper into what comprises the score, and how you can positively impact the result.
Capacity measures a borrower’s ability to repay a loan. It compares income to recurring debt obligations. Also important is how long a borrower has been in his or her job
Capital includes your personal and corporate net worth. A significant contribution towards a property acquisition, for example, decreases the likelihood of loan default. Your ability to tap into cash resources underscores your ability to weather a financial setback.
Collateral refers to what a borrower is pledging to secure the proposed loan. It gives assurance to the lender that there is recourse to an asset (for example a car or home) in the event of borrower default.
Conditions refers to the intended use of the loan proceeds, and will impact the amount and rate, and other terms. For example, a loan specifically earmarked for home improvements would likely be easier to secure, than a general loan with no specific purpose in mind.
Your likelihood of being approved for credit, on favorable terms, is dependent upon how you are accessed in each of these areas. Become familiar with the 5 C’s, and be able to demonstrate your overall credit worthiness makes you a good risk for your lender.