5 C's of Credit
Capacity definition
ability to repay
Primary repayment source
capacity
Secondary repayment source
capital
what are the five C's of credit?
character, capacity, capital, collateral, and conditions
Third repayment source
collateral
Character measure
credit report and credit score
Collateral measure
fair market value of the pledged collateral, calculate loan to value ratio, orderly liquidiation value, forced liquidation value
Conditions measure
general economic conditions, industry and job conditions, employment history/ stability # of years
Capital definition
net worth
Conditions definition
personal and business
Capacity measure
recurring cash flow, debt to gross income ratio (36% guideline), mortgage debt to gross income ratio (28% PITI guideline)
Capital measure
total assets minus total liabilities, evaluate composition and liquidity, low not high leverage (debt)
Character definition
willingness to pay