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