In Today’s Current Mortgage Qualification Requirements your Credit Score not only Affects What Down payment would be Required, but also Affects the Limits of the Two Debt Ratio Guidelines used to determine Maximum Budget for your Purchase.
We Have Solutions for all Types of Credit with Access to all types of Lenders including Private Lenders.
DEBT RATIO EXPLANATIONS:
GDS- Gross Debt Service – The percentage of a borrower’s gross income used to cover monthly payments associated with housing costs including utilities, mortgage payments, taxes and condominium fees when applicable. This Factor can vary from 32% to 39% Dependent on Credit Score and Individual Lenders Guidelines when dealing with Insured Mortgages with less than 20% Down payment.
TDS- Total Debt Service – The ratio of a borrower’s total monthly debt as compared to his or her monthly gross income. Lenders use this ratio to determine how much the loan applicant is allowed to borrow. This Factor can vary from 42% to 44% Dependent on Credit Scores and Individual Lender Guidelineswhen dealing with Insured Mortgages with less than 20% Down payment. .
Minimum Credit Scores Allowed by Insurers to Qualify for an Insured Mortgage is a Score of 600 but that Minimum Varies with Lenders Individual Guidelines.
There are Mortgage Options for Clients when more than 20% Down is used in the Mortgage Application to allow Lower Credit Scores and in Some instances Increased GDS and TDS Limits. These are very Lender Specific. Lenders in this type of Scenario vary from A Lending Instutions such as Banks and Monolines to Private Mortgage Investment Companies.
Having Access to Multiple Lending Sources allows you the Option of Finding a Mortgage Solution that Meets your Needs and Criteria.
We Can Also work with you on a One on One Basis to Help Restructure your Liabilities and Assist you in Increasing your Credit Scores on a Ongoing Basis.
Know The 5 Cs of Credit to Accelerate a Mortgage Application
Lenders analyze deals using the five Cs of credit to Better understand a Potential Client.
Going over them before submission will make your application more robust and you’ll get a true sense of whether the deal is a fit for that lender.
1. Capital
What is the down payment amount and where is it coming from?
What is your net worth?
What assets do you have?
- Chequing
- Savings
- Bonds
- Vehicles
- RRSPs
- Pensions
- Vacation homes
- Rental properties
This information will help your underwriter make sense of what your client spends their income on.
2. Credit
Have you ever filed for bankruptcy or consumer proposal?
If so, was there a foreclosure? Has it been discharged? What is the balance owing?
Who and what is registered on title?
No surprises is a good thing in this case.
Are your credit issues an isolated occurrence?
Was there an injury or a death in the family?
Significant life events can happen to anyone and we understand that. If the underwriter can see the whole story, they’ll have more ability to approve the file.
3. Capacity
What is your income?
Double-check the client understands their compensation breakdown. Allowances, bonuses and shift pay can’t be used in all cases.
Are your hours guaranteed?
What is the minimum guarantee if you are is working part-time?
Do you own any other properties?
4. Collateral
What condition is the property in?
- What year it was built?
- Is there any work in progress?
- Does anything need replacing?
- Anything unique about the property?
- Square footage
- Train tracks
- Cell towers
- Power lines
- Environmental protected areas
Where is the property located? Is it within the lender’s lending areas?
5. Character
What is your marital status?
- Married
- Common law
- Widowed
- Divorced/separated
Is there support payable or received?
Try to complete your application fully and accurately as all the information on the application ultimately leads the lender through an assessment on character.
- Who are we lending to?
- Are you likely to be able to handle the obligation?
- Do you demonstrate pride of ownership?
- Have you gone through a major life event and are working their way out of a tough situation?
The lender, after reviewing the application notes and details, should know you as well as you do.
Debt consolidation for bad credit.
Credit can be wonderful or a source of stress. It’s great to have when you need it, but it’s easy to take on more than you can manage. Before you know it, you’re missing payments on your credit cards or making only minimum payments. You might be late paying other bills as you juggle your money. Now your credit score is not as great as it was and you’re looking at consolidating your debt. Let’s explore your options.
Is consolidating debt worth it?
There are many benefits to consolidating debt:
- A single monthly debt payment often adds up to less than the multiple debt payments you were making, so you free up some of your budget.
- Most consolidation options charge less interest than credit cards, so more of your payment is going toward the amount you owe.
- You’ll have only one monthly payment to manage. When you have multiple payments to remember, you increase your chances for late payment.
- You may feel less stressed about your finances—the value of which should not be underestimated.
All these benefits will be short lived if, after a few months, you find yourself with more debt in addition to your consolidation payment. Before you consolidate your debt, it is so important to look at how you got into debt in the first place. Sometimes the reason is beyond your control, such as a job loss (and this is why it is so important to have an Emergency Fund). A large percentage of people simply spend more than they earn. Either way, make a budget and a plan as to which expenses you will cut. Once you’ve paid off your initial debt, you can direct that money toward other goals.
The Financial Consumer Agency of Canada and Practical Money Skills Canada websites provide information about financial literacy and managing budgets:
The Financial Consumer Agency of Canada
If you simply don’t earn enough to pay your necessary expenses and debt payments, consolidating your debt may not be the right option for you. If that describes your current situation, we recommend speaking with a debt counsellor about your options. Look for one that is a member of either Credit Counselling Canada or the Canadian Association of Credit Counselling Services. Below are some resources about debt counsellors.
Credit Counselling Society
Credit Canada
Consolidated Credit
Money Mentors
How do I consolidate my debt into one payment?
Debt consolidation is the process of bringing your smaller payments together under a single payment at a lower interest rate. There are several ways to do this including consolidation loans, lines of credit, and balance transfers to lower interest credit products.
An option that shouldn’t’ be overlooked is using the equity in your home to refinance your mortgage. The equity in your home is determined by subtracting the amount you owe from the value of the home. The value of your home is not necessarily the same as the amount you have paid on the mortgage because housing values fluctuate over time. If you have already paid off a significant portion of your mortgage, you might consider refinancing your mortgage with the new debt amount added or applying for a home equity loan (also called a second mortgage).
Is it a good idea to refinance my mortgage to pay debt?
Refinancing your mortgage to incorporate more debt is not as simple as asking for a bigger mortgage.
- You’ll need to qualify for the new mortgage amount.
- There may be fees involved in refinancing.
- If your mortgage loan increases too much, you may need to buy mortgage insurance.
- If you’re struggling to make your debt payments now, and you’ll still be struggling with this new mortgage, you’re putting your home at risk.
You will most likely increase the time it takes to pay off your mortgage which could impact retirement plans On the other hand, if you know you can make the payments, interest rates for mortgages are typically lower than other types of loans.
If you’re looking at refinancing to help you consolidate debt, talk to your mortgage broker about your options.
Can I refinance my mortgage if I have high debt ratios?
Your Debt Servicing Ratios ( see below) weighs your financial obligations against your income. If you have too much debt, you may not be able to find a lender willing to refinance your mortgage. In that case, you’ll need to look at other ways to manage your debt.
Mortgage brokers have access to a variety of lenders, including those that specialize in alternative lending. Alternative lenders can offer more flexibility when helping clients address debt.
How will consolidating debt affect my credit score?
If you do take out a new loan or refinance your mortgage, your credit score may take a hit in the short term because you have a new credit account. Over time, if you make your payments on schedule and you don’t acquire additional debt, your score should improve.
How can I fix my credit after consolidating debt?
There isn’t a quick fix for rebuilding your credit score. It takes time and the responsible management of your debt from this point forward. There are some important things you can do that will help.
Make your payments on time
According to the Financial Consumer Agency of Canada, paying your bills and debts on time, every time, is the single most important thing you can do to improve your credit.
Keep that credit card
You may be tempted to close all your credit card accounts after you consolidate debt. And you should close some of them, especially the newer accounts. But here’s why you should keep some open:
- To have a credit history you need to have a history of using credit. This means it’s better to hang on to your credit accounts that have a record of payment. Keep one or two of your oldest accounts open.
- It’s a good idea to have a mix of credit products on your credit report. Once you consolidate your credit, you’ll have both the loan or mortgage and the credit card.
- If you cancel all your credit cards now, and then find you need one later, you’ll need to apply, and that will lower your credit score.
If you think you’ll be tempted to use your credit card, don’t carry it with you. Make an occasional small purchase with the card to keep it active.
Be smart about using credit
Consolidating your debt doesn’t mean you need to stop using credit altogether, but it’s important to be thoughtful about how it affects your credit score.
- If you make a new purchase, try to pay the balance in full and on time. If you don’t have the money to do so, consider whether you really need to make that purchase.
- Try to keep the total amount you owe to less than 35% of the credit you have available. You may think that lowering your credit limits will help, but it’s a lot easier to carry a high percentage of debt on a card with a lower limit. For example, if you owe $1,000 on a credit card with a $2,000 credit limit, you’re using 50% of your available credit. If you borrowed the same amount on a card that had a $5,000 limit, you’re using only 20%. While you owe $1,000 in both cases, there is a perception that with the lower credit limit, you are closer to maxing out your card.
- You should also avoid applying for new credit. Even if you don’t use it, the act of applying will lower your credit score.
Your mortgage broker is invested in your financial health. If your mortgage is at risk because of debt, they can help you explore your options and guide you to appropriate resources.
Securing a mortgage during or after a Consumer Proposal
There is a story behind every consumer proposal. As a mortgage broker, you’re the one who will hear those stories and put together mortgage solutions for your clients who may also be in consumer proposals. Finding the right mortgage solution in these situations may not be easy, but alternative lenders look to understand those stories and are often your best bet for success.
What is a consumer proposal? A quick explanation for your clients
Clients who are struggling with debt, might ask, “What is a consumer proposal?” In short, it’s a legally binding debt relief process where a person proposes a way to pay creditors some of what they owe and/or spread payments out over a longer time period, up to five years. Your client would work with a Licensed Insolvency Trustee to develop the consumer proposal.
A consumer proposal is not the same thing as bankruptcy, but as far as credit ratings go, they have a similar effect.
Will a consumer proposal affect a mortgage renewal? What your clients need to know
How will a consumer proposal affect my mortgage renewal? That’s the question at the back of any homeowner’s mind when they are facing a consumer proposal. After all, losing one’s home would be devastating.
Simply put, a client who is in or has recently completed a consumer proposal is seen as a credit risk. Completing their proposal does not erase their history of not paying their debts. Standard lenders will not likely finance a mortgage until your client has had at least two years with a clean history following the end of their consumer proposal. Even then, to have a chance for approval, your client will need a 20% down payment and paperwork that demonstrates they have been working on rebuilding their credit.
An alternative lender is more likely to take on this kind of deal because they look at the people and circumstances as well as the numbers. Alternative lenders will look at your client’s specific situation and assess the risk.
How long after a consumer proposal can clients expect to get a mortgage?
If mortgage financing or renewal refinancing is approved, your client will be asked to use the proceeds to pay out the consumer proposal.
Once someone is getting their finances back on track, they may wonder how long they must wait after a consumer proposal to get a mortgage. The answer depends on the lender. Traditional lenders are unlikely to consider a new mortgage until the client has fixed their credit. Alternative lenders are more willing to work with your client to help them move forward.
Your client can apply for a mortgage at any time, even while they are in the middle of their consumer proposal, but the lender is still going to look at creditworthiness and require documentation. If mortgage financing or renewal refinancing is approved, your client will be asked to use the proceeds to pay out the consumer proposal.
Mortgage rate expectations while in a consumer proposal
Clients should expect higher mortgage rates while in a consumer proposal. There are some risks in financing mortgages in these situations, and the interest rate will reflect that. Once your client has started to rebuild their credit, they may be able to negotiate a better rate when it is time to renew the mortgage.
Can your client refinance to pay off a consumer proposal? Is it beneficial?
They can! Sometimes refinancing a mortgage is the quickest way to pay off a large debt like a consumer proposal. In these situations, your client may need a larger mortgage so they can cover both the mortgage amount and consumer proposal debt remaining. Here are some things to consider:
- Is there enough equity in the home? No bank will finance a home for more than its value, so there needs to be some equity to cover off the additional loan amount.
- Is the current mortgage term close to maturity or was it just renewed? The answer to this will determine just how large the prepayment penalties are likely to be if the mortgage is renewed early with a different lender. Additional costs won’t help a client who is already dealing with a consumer proposal.
- What was the reason for the consumer proposal? This question indicates risk, and this is where the client’s story matters. Did they lose their job and are catching up now that they are employed again? Did they gamble away their money? The lender will want to assess whether the situation is likely to happen again.
- How does your client currently rate on factors used to determine creditworthiness? Yes, your client’s consumer proposal means their credit score won’t be great. However, evaluate all the factors, such as credit history (or the rebuilding of it), bank statements, and employment.
If the client’s financial situation and current mortgage terms point toward refinancing, there are some good reasons to consider it.
Sometimes refinancing a mortgage is the quickest way to pay off a large debt like a consumer proposal. In these situations, your client may need a larger mortgage so they can cover both the mortgage amount and consumer proposal debt remaining.
5 reasons why refinancing a mortgage to pay off a consumer proposal is beneficial:
- Start rebuilding credit sooner. A consumer proposal must be fully paid out and a completion certificate issued before your client can begin fixing the damage to their credit. The sooner they pay off their debt, the sooner they can begin moving forward.
- Keep their mortgage. If their credit cards and loans were at the same bank as their mortgage, and are part of the consumer proposal, that bank may not want to renew their mortgage. Refinancing with a different lender may be a better option.
- Lower their monthly payments. Generally, refinancing and debt consolidation can results in less of their monthly paycheque going toward the debt.
- Make life easier. If your client can’t pass a basic credit check, they’ll have a hard time making large purchases, such as a car, or more routine purchases. Even cell phone providers check credit.
- Apply for credit again. Once the consumer proposal is paid out, your client can begin looking for options to rebuild their credit, including a credit card. The card might need to be a secured credit card, meaning the issuer must hold some security in return for issuing the card.
Rehabbing and fixing credit after a consumer proposal
Is there any easy credit fix once the consumer proposal is paid out? Not really. It requires responsible credit management for at least a couple of years before some lenders will consider your client an acceptable risk.
…Some credit card debt may continue to show late payments, even after the consumer proposal was filed and even after it has been completed.
The first thing your client should do is review their credit report and clean up any issues on their credit history. This can be a messy task, but it’s integral to rebuilding their credit. In particular, some credit card debt may continue to show late payments, even after the consumer proposal was filed and even after it has been completed.
Then there are some straightforward things they can do to build better credit:
- Use credit. This may seem odd, but your client cannot build a credit history without doing this. They just need to do it responsibly.
- Pay bills on time. Don’t wait for the due date—pay three to five business days in advance to allow time for processing.
- Show stability. Don’t switch up a long-time cell phone contract or open new credit accounts when there is already an existing account.
- Continue to check their credit report for errors.
Disadvantages of a consumer proposal – when it’s not the right financial decision
The hit to a person’s credit rating is the biggest disadvantage of a consumer proposal. If there are other ways to address the debt, those options should be explored before making the final decision. The impact of a consumer proposal lasts for years. Once your client agrees to it, they need to be able make the payments or they’ll end up in the same situation they were before.
A Licensed Insolvency Trustee can help determine whether a consumer proposal is the way to go.
A final thought on consumer proposals
Without question, it’s easier to get into debt than to get out. A consumer proposal may be the answer for a client who is committed to better managing debt in the future. It does not mean they are a bad credit risk—that’s where their story comes in. Someone who lost their job, accumulated too much debt just to live, and now has a new job might be someone worth taking a risk on.