​Conceptions, misconceptions and the five C’s of credit

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When talking about the five C’s of credit, there is a difference in where conventional and private lenders place the order.

“Conventional lenders generally look at the five C’s of credit in this descending order of importance: Collateral; Credit; Capacity; Character; and Capital,” says Hali Strandlund-Noble, AMP, SVP Residential Mortgage Investments & Broker Relations, Fisgard Asset Management Corporation. “Private lenders generally look at it like this: Collateral; Capacity; Capital; Credit; and Character.”

That difference could be traced to what Strandlund-Noble describes as some of the common misconceptions of private lending.

“’Bad’ people have bad credit; private borrowers don’t pay and private deals are harder to package,” says Strandlund-Noble. “Two others are that there is a reputational risk for brokers arranging ‘private’ mortgages; and that private mortgage rates and fees are astronomically higher.”

The face that private lenders place a higher importance on capacity as opposed to credit is the significant different between conventional and private lenders.

Will the client be able to repay the loan? What are the financial circumstances of the client? Has the client thought about or reviewed their budget to determine his/her ability to repay the loan?” says Strandlund-Noble. “Are sources other than employment income depended upon to make these payments and are these sources stable?”

Strandlund-Noble does give credit its due, as it represents the accumulated experience of the client’s habits in performing credit obligations, providing a record of past credit experience.

But if there is a problem, “a full and satisfactory explanation should be received,” she says.
 
  • Mike on 2015-06-04 9:40:39 AM

    Capacity is always the most important C, if they have no ability to repay then giving them the money is reckless. A good broker will convince them to sell and buy something they can afford not rape them. I have seen so many people taken advantage of just because they have equity. Broker gets rich. I suppose the character of the broker might be the other "C"

  • Ron Butler on 2015-06-04 10:47:07 AM

    I think in the private lending business the five "C's" are collateral, collateral, collateral, collateral, and collateral. If I am dead certain I am lending on a solid, plain vanilla property in an easy to re-sell neighborhood at a low loan to value based on a conservative appraisal from a highly respected appraiser the other "C's" don't mean much. Before everybody launches into the long harangue about looking out for the client's best interest consider this: it's their property and if they have decided they want to take a chance to buy some time to get straightened out that's their business nobody else's. I have told many people to sell their houses over the years. 90% of them have said they wanted one more chance. So let's worry about our private INVESTORS and make sure we lend privately on perfect collateral.

  • Gary W. on 2015-06-05 11:09:08 AM

    Man, I just can't compete with these Lagos, Nigeria-based lenders!
    **
    I've been a Toronto GTA private equity lender for thirty years--low seven figure portfolio. Yes, collateral is key. But since the last thing I ever want to do is complete a power of sale, capacity and character rate just as high in my books.

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