One essential system that lenders rely on is the five C’s of credit. This system plays an important role when it comes to qualifying loans. The five Cs serve as a valuable benchmark that financial institutions can use to score a borrower.
Lenders big and small have relied on them for decades. But now, things are changing as artificial intelligence is redefining the way we approach lending.
What Are the Five C’s of Credit?
The most common application of credit is the credit score. Credit reporting agencies are responsible for calculating this score. It looks at things like payment behavior, utilization, and credit history.
But it isn’t as simple as giving someone a score. It’s a lot more complex than that.
A financial institution will also look at what someone wants to use a loan for. They will look at things like whether someone wants to consolidate debt, invest, renovate, or go on a vacation.
Lenders will also assess the current economic climate, what the markets look like, what trends are forming, and your ability to repay a loan should the economic climate change.
Credit plays an important role in our society, and it’s one of the main benchmarks for determining loan eligibility.
Capacity is an individual’s ability to repay a loan. Many lenders see this as the most important factor to consider when underwriting a loan.
Simply put—if an individual is unable to pay a loan back, they aren’t a good candidate. But how is capacity calculated? Lenders look at an individual’s capacity to repay the loan. They will want to determine things such as:
- How you intend to repay it
- What type of income you earn
- Whether you are self-employed
- How consistent your revenues and gross income are if you are self-employed
- What other sources of income you have
- The timing of the repayment
- Your payment history with existing credit relationships
All of these factors combine to a story about your credit capacity, ability to repay a loan, and overall trustworthiness.
Capital refers to your net worth. This is determined by the value of your assets, including things such as property, investments, liquid cash, and more.
Lenders practice risk management when looking for suitable borrowers. No lender wants to assume complete risk in a loan. They expect the borrower to contribute some of their own assets to back the loan.
Qualified borrowers must have enough assets to convince a lender that they are trustworthy and capable of repaying the loan.
Collateral refers to assets that are used to secure a loan in the event of a default. It’s an extra form of security that protects the lender.
If you purchase a property and use an existing one as collateral, you agree to use your original property as a source of repayment if you breach the terms of the new loan.
Character is one of the harder things for lenders to gauge. It has to do with the impression you make on a lender. Character is assessed using things like your length and type of employment, time spent at your current property, repayment behavior, age vs. assets, and debt management.
How Are the 5 C’s of Credit Changing?
The five C’s of credit have been an integral part of lending for decades. But assessing each of these categories is time-consuming for mortgage brokers and lenders.
Working through all of these details requires a lot of manpower and money before a commitment is even made.
It’s not uncommon for an underwriter to spend more than a week working on a single file. And when every detail matters, it can take even longer.
Innovative automated underwriting software like FundMore is changing the way we interact with the 5C’s of credit.
Here are a few examples of how this is happening:
- Analyze more data quicker. Most of the early underwriting process is dominated by manual tasks. An AI-driven platform like FundMore can analyze multiple sources of income in just seconds, reducing your labor costs and increasing the efficiency of your underwriting process.
- Compatible with modern borrowers. The millennial market is vastly different than previous generations. Millennials often work several jobs, own small businesses, and rely on various sources of income. AI platforms are capable of scoring difficult candidates that the traditional underwriting process may avoid. This can provide your business with access to an untapped market of potential borrowers.
- Eliminate redundant tasks. Verifying the details of a mortgage file is important, but also time-consuming. AI can handle redundant tasks faster and with lower error rates. This allows your underwriters to focus on other essential tasks that require a human touch.
- Reduce risk. The goal of any lender is to reduce their risk. You can program your automated underwriting software with your own in-house policies. An AI platform will use the rules you define and analyze entire mortgage files in seconds, reporting every error it detects.
- Create committed files faster. The underwriting process is slow. Automated underwriting software can help you create committed mortgage files 90% quicker. This will decrease your costs and improve your customer satisfaction.
The 5 C’s of Credit Are Changing—So, Don’t Fall Behind
The 5 C’s of credit aren’t going anywhere. But automated loan underwriting platforms like FundMore are going to change the way we interact with them.
The days of a slow and drawn out mortgage process are nearing their end. Modern borrowers are more tech-savvy, and desperate for modernized lending solutions.
The banking industry is already betting big on AI technologies.
JPMorgan Chase increased its tech budget to $11.4 billion in 2019 and has invested in Contract Intelligence and predictive analytics.
Wells Fargo is banking on predictive analytics.
Bank of America Vis leveraging chatbots to improve customer experiences.
The Royal Bank of Canada created its virtual assistant NOMI to help its customers manage their finances through predictive analytics.
The list of banks embracing the push for AI is endless. This trend isn’t going to change anytime soon. Lenders big and small must learn to embrace it and implement these systems into their business if they want to remain competitive against those who adopt them early.
FundMore is an automated underwriting platform that helps small and medium lenders collect, verify, and build fully-committed mortgage files in seconds. Our platform is capable of helping mortgage brokers, small and private lenders, and other financial institutions make informed choices when it comes to key lending decisions.
Are you interested in learning more about FundMore, and how it can improve your underwriting processes? Get in touch with our team today to schedule a demo.
FundMore helps you complete fully-compliant mortgage files in just minutes, not days or weeks.