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.