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The-Mortgage-Gal

Improve your credit score

It can be frustrating to find out that your mortgage application has been affected by a low credit score or potentially incorrect information reporting on your credit report.

If you have had problems with credit in the past, tell your mortgage specialist right away. They can then review your credit report and offer suggestions and advice as to how to improve your score, as well as possible options (ie: larger down payment, co-signer, etc).

When you apply for a mortgage, your mortgage specialist will pull your credit report. What they are looking for is your Beacon score.

A Beacon score (also called a credit score) is a rating used to rank your credit-worthiness. This number tells lenders how likely it is that you will repay your mortgage.

In Canada, we have two credit reporting institutions: Equifax and TransUnion.

Your beacon score is a very important part of the application process. Beacon scores range from 300 to 800 plus, with the average Canadian scoring in the 700 range. The minimum credit score for insured mortgages (less than 20 per cent down payment) is 600.

Most lenders require that your score be 680 or higher. 

Beacon scores are calculated based on several factors. Here is a quick overview:

PAYMENT HISTORY — Factors in the frequency of, and number of, payments over 30 days late, collections, judgments, and bankruptcies. A single 30-day late payment can drop your score 15-20 points.

CURRENT DEBTS —  Considers how much you owe (in absolute terms and compared with your credit limits), how many creditors you owe money to, and how much you could owe if you obtained all your available credit.

AGE OF ACCOUNTS — The longer your accounts have been open the better. The minimum requirement (in most cases) when applying for a mortgage is two active accounts that are at least two years old.   

TYPE OF CREDIT — Bank loans, credit cards, and revolving credit accounts all impact your score differently.

CREDIT INQUIRIES — Numerous credit applications in the past 12 months affect your score significantly and is definitely not advised. This is the advantage of using a mortgage broker as your credit is only pulled once for multiple lenders. 

Accounts such as cellphones, loans, credit cards, mortgages and some utilities report your payment patterns. It is crucial that you make all of your minimum payments on time to ensure your credit score stays high.

It is also important to try not to carry significant balances on your credit cards or lines of credit. Having credit available, but unused helps increase your credit score.

Many people don’t realize that having creditors access their credit report can actually lower their score. If you are an avid credit seeker (applying for numerous credit cards, or at multiple car dealerships), this will be reflected in your score.

Often when you pop in to try out a vehicle, the dealership pulls your report while you are out on the road. Make sure you read the fine print before you sign off to go for a test drive.

I recommend that you check your credit report annually to ensure that everything is being reported correctly. Identity theft is much more common than it used to be, and by checking yourself you may catch this early.

If you have a common name, you may see someone else’s information showing on your credit report. If you find this to be the case, it is important to contact the credit bureau to have it corrected as soon as possible.

If you pull your own credit report, it does not affect your score. If a creditor pulls your credit report, it can drop your score a few points.

HOW TO IMPROVE YOUR CREDIT SCORE

If you have had credit difficulties in the past, there are ways to improve your score. There are no easy fixes, so beware of companies that promise they will help you improve your score quickly.

Unfortunately there are many companies out there that charge significant fees but don’t deliver.

Here are some suggestions from the Office of Consumer Affairs that will help bring your credit score up:

  • Always pay your bills on time. Although the payment of your utility bills, such as phone, cable and electricity, is not recorded in your credit report, some cellphone companies may report late payments to the credit-reporting agencies, which could affect your score.
  • Try to pay your bills in full by the due date. If you aren’t able to do this, pay at least the required minimum amount shown on your monthly credit card statement.
  • Try to pay your debts as quickly as possible.
  • Don’t go over the credit limit on your credit card. Try to keep your balance well below the limit. The higher your balance, the more impact it has on your credit score.
  • Reduce the number of credit applications you make. If too many potential lenders ask about your credit in a short period of time, this may have a negative effect on your score. However, your score does not change when you ask for information about your own credit report.
  • Make sure you have a credit history. You may have a low score because you do not have a record of owing money and paying it back. You can build a credit history by using a credit card. 

If you have had credit issues in the past, don’t despair. Although you may not qualify for a mortgage right now, by following a structured plan it is possible to get yourself back on track.

It will take time, patience, and dedication, but the end result of owning your own home will be worth it.



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Mortgage pre-approval

Before you venture out to look at houses for sale, it is a good idea to meet with your mortgage specialist to complete an application and find out how much you are qualified to borrow.  

At your first appointment, you will complete a credit application. Information you need to have on hand includes:

  • personal data such as your legal name, birth date, and social insurance number;
  • home address and employment information;
  • a description of your assets that includes what you will use for your down payment; and
  • a list of your outstanding debts (credit cards, loans, etc).

Your mortgage specialist will access your credit bureau. Your credit bureau provides a history of how you manage your credit, and is a key factor that lenders review when considering your application.

Your mortgage specialist will confirm the information that you have provided in your application. You will be asked for documentation such as bank statements and current pay stubs, and will need to demonstrate that you have your down payment organized.

It is helpful to start gathering documentation ahead of time to avoid last minute stress. Typically you will need to organize the following:

  • Ask your employer to prepare a letter on company letterhead outlining your name, base salary or hourly rate, normal hours worked per week, position and length of service. A recent pay stub and a copy of your T4 from last year may also be required.
  • If you are a commissioned salesperson, your last two years personal tax returns and Notices of Assessment from Canada Revenue Agency 
  • If you are self-employed, your last two personal tax returns and the Notices of Assessment from Canada Revenue Agency, as well as the last two years’ business financial statements and two years’ business tax returns (if applicable) 
  • Social Insurance Numbers 
  • At least 3 years’ history of residence and employment 
  • Banking information (name of financial institutions, address, and type of accounts, account numbers) 
  • Information and statements showing your assets (what you own) and their value. i.e. cash amounts, stocks, bonds, RRSPs, vehicles 
  • If you are separated or divorced, you may be asked for a copy of your agreement to confirm any amounts owing (child support, alimony, division of assets)

After considering your particular situation, your mortgage specialist will submit your application to potential lenders. You will find out the maximum amount you are qualified for, and most lenders will issue a 120-day rate guarantee.

This rate guarantee means that even if rates go up while you are shopping, your mortgage will be processed at the pre-approved rate provided it closes within the 120-day period. If you have not purchased within the 120 days, it is possible to extend the rate guarantee based on current rates.

It is important to understand that even though you are considered pre-approved for a mortgage, final approval is still subject to the property you buy being considered suitable by the lender. As well, you must be able to satisfy the lender’s requirements for appropriate documentation.

How much can I afford?

Your mortgage specialist will be able to calculate the amount that you are eligible to borrow. The standard rule of thumb (subject to certain exceptions) is that your housing costs should not be more than 32 per cent of your gross income, and your total debt payments should not exceed 40 per cent of your gross income.

Gross income is the amount you are paid by your employer before any deductions for income tax, CPP/EI, pension amounts, or benefit plans.

Housing costs include the principal and interest portion of your mortgage, property taxes, and an allowance for heating costs.

Total debt payments means all of your monthly payments. This includes housing cost as well as any loans or credit cards that you have.

In my last few columns I talked about thinking carefully about your potential mortgage payment.

It is very important to consider your lifestyle and spending habits … just because you are pre-approved for a certain amount does not mean that you will find it comfortable to carry that particular mortgage payment.

You will want to plan for expenses such as heating, property taxes, home maintenance and renovation as required. Practice making the higher mortgage payment and additional expenses of owning your own home for a few months.

This will give you a good idea of whether you want to commit to the maximum amount, or perhaps scale back a little to allow for more discretionary spending.  

Having a pre-approval in place before you go shopping helps you to determine a realistic price range, and allows you time to deal with any issues that may affect your application. A pre-approval provides security knowing that you have a rate guarantee in place should interest rates increase.

Once you’ve booked an appointment to get a pre-approval in place, it’s a great idea to write down a list of any questions you would like to have answered.

Knowing ahead of time how much you can afford will help guide your search for a new home.



Know Your ABCs

Know your ABCs — of mortgage lenders that is.

Trying to navigate the mortgage world can seem like a daunting task. The up-side of having so many choices is that consumers have access to solutions for almost every situation.

As a mortgage broker, I periodically get calls from realtors who say that their buyers have been declined by a bank, and ask if there is a way that I can find them a mortgage.

Many times I can.

My first home purchase was very different than what I see with clients today. I lived in a small, northern mill town. Everyone earned essentially the same amount of money. All of the houses were pretty much the same.

My ex-husband and I went looking at houses with a realtor, made an offer, then made an appointment to get a mortgage.

We bought our first home for $35,000 and had absolutely no idea what we were doing.

As a young couple with strong income and no debt other than a Visa card, it didn’t occur to us that we wouldn’t get a mortgage. But what about if you are not in that situation?  

What if you live in an area like the Okanagan where housing prices are high and wages comparatively low?

What if you have had blips in your credit?

What if you already have a home with a significant amount of equity, but your income has dropped?

There are several types of mortgage lenders in the marketplace. We generally categorize them as A lenders, B lenders, or private (equity) lenders. Within each of these groups, each lender has slightly different guidelines.  

When we talk about A lenders we are generally referring to chartered banks, monoline lenders, and credit unions. 

Monoline lenders are companies that offer only mortgages. They do not have branches or storefronts, and do not have other financial products that they will try to cross-sell to their clients.

A lenders typically offer the lowest mortgage rates, and clients need to qualify based on fairly strict guidelines. When most people think about getting a mortgage, they first think of approaching an A lender.

B lenders generally require more down payment or equity and have somewhat less strict qualification requirements. B lenders will consider clients with lower credit bureau scores, and may accept less traditional sources of income.

The trade-off is slightly higher interest rates. B lenders tend to be about one percentage point higher than A lenders; each application is priced differently based on the client’s particular situation.

Private or equity lenders are primarily concerned with the property that is being mortgaged as opposed to the client. Private lenders typically want to see significant equity in a property (generally at least 25-35 per cent) and are less concerned about a client’s credit history.

Interest rates are considerably higher with private lenders, and most charge fees to set up a mortgage. Private mortgages are intended as a short-term solution to help clients get back on their feet or deal with an urgent situation where they don’t qualify to borrow money any other way.

Within each of these groups of lenders there are differences in the mortgage products they offer and how they qualify their clients. One example of this is allowable income.

Over the last few years most of the banks have decided not to include child tax benefits as income. There are still several financial institutions that do, and this can sometimes mean the difference between qualifying for a mortgage or not.

Another example is the New to Canada programs offered by many lenders. Last fall, I helped a couple that was referred to me by their chartered bank. Most of the couple’s down payment came from a housing incentive that was part of his job offer.

The limited credit they had was squeaky clean, his employment was solid and income was high, but their bank would not accept the funds from his employer as their down payment.

I was able to find them a mortgage at a monoline lender with a lower interest rate than their bank, and the funds from work were an acceptable down payment.

For borrowers putting down less than 20 per cent, minimum credit score guidelines are set by the mortgage insurers (CMHC/Genworth) and the lenders need to work within those guidelines. For borrowers that have 20 per cent or more down, certain lenders offer more flexibility with respect to credit scores.

If you have been through tough times and your credit is badly bruised, working with a B or private lender for a short period of time can help you reestablish your credit and finances. Again, the goal is to set you up to move back in to an A lender with lower interest rates.

The type of home you are buying might also affect the decision of which lender to work with. Some lenders will only consider cookie-cutter homes in urban neighbourhoods, while others are open to financing homes in smaller communities, small hobby farms, or acreages.

As a mortgage client, knowing that there are alternatives available can mean the difference between renting for another few years or buying a home now.

It’s a great idea to talk to a mortgage broker to see what options are available for your particular situation.





Have a plan

Setting Yourself up for mortgage success

I had an interesting conversation with clients about my last article Are you mortgage ready? We chatted about living within our means as opposed to living paycheque to paycheque.

We were signing final paperwork and going over a recap of their mortgage application. They looked at the list of their debts and basically said, “How did we get here?”

Both the husband and wife work full-time, and have one child who is very athletic and competes at the national level in his sport.

These parents cover all of his travel costs to get him to competitions. They have a nice home and dependable vehicles; nothing fancy or high-end on either front.  

The travel expenses for their son’s sport have added up over the years to the point they realized they had to make some difficult decisions. We talked about how extraordinary expenses like sports and the related travel can derail a sound financial plan.

Years ago, I worked with a couple who bought their first home based on the husband’s income only. They told me at our initial appointment they planned to have their home paid off in five years so that she could stay home when they decided to start a family.

I remember thinking that the odds of them sticking to this plan were very unlikely.

They made double-up payments every month, and made lump sum payments every year. Sure enough, when the mortgage came up for renewal, they had enough money in their savings account to pay it off in full. They are still in the same home and have raised two lovely daughters there.

I know another couple who bought their first home based on the husband’s entry-level salary. Over the years, he worked his way up to senior management. 

They took the unusual step of continuing to live as if he were only making the salary from his early days. Everything else they banked. They had their house paid off within 10 years, and were able to retire early and now travel extensively.

Both of these are situations where the couples were very committed to their plans. House prices were considerably lower at the time. The cost of living was lower. So were their incomes.

The point is that they made lifestyle choices strategically and in both cases this dedication meant they are able to live debt-free at relatively young ages.

I am currently working with clients who shared an idea with me. They decided to start saving for a home, and found it challenging to tuck away as much as they thought they could. For a month they tracked every penny of their spending, and realized how much they were spending on treats like fancy coffees.

They implemented an “Impulse Fund” program. Every time they talked about heading to their local barista, they instead transferred the equivalent money to their down payment fund. This simple change meant an additional $300 in their account at the end of each month.

My last article talked about taking some time to figure out if you are ready to buy a home; not only pre-approved with down-payment in hand, but prepared for the ongoing expenses.  

Are you ready to adjust your budget and current lifestyle to own a home?

The next step is to think about what type of home is going to best suit both your current and future lifestyles. For instance, will a slightly older or smaller home near great schools be a better long term fit than a condo downtown?

Will looking for a home with a suite mean you can get in to a slightly newer or larger home? Do you spend a lot of time away hiking/biking/camping so a smaller home might be a better option?

When you crunch the numbers and price ranges with your mortgage specialist, think about buying a home that is not at the top of your price range. Allow yourself a buffer so, if your income changes, you will still be able to make your mortgage payments.

Take some time to think about your wish list. Be very clear about your “must have” and “nice to have” features. Revisit your budget. Think about your lifestyle, and what type of home will work best. Do your research upfront.

Develop a plan and stick to it. Small changes can make a huge difference.

Being strategic about your home purchase will help set you up for long-term financial success. 



More The Mortgage Gal articles

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About the Author

Laurie Baird and Tracy Head are mortgage brokers with Verico Complete Mortgage Services. Together they have over 45 years of experience in the mortgage industry.

As mortgage brokers, Laurie and Tracy spend time getting to know the people they work with and help them understand the mortgage process. They support their clients before, during, and after a home purchase.

Laurie and Tracy are able to offer their clients advice and options. With access to over 40 different lenders, Laurie and Tracy are able to match the needs of their clients with the right mortgage package. They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit:
http://www.okanaganmortgages.com

Visit Laurie's blog at: https://www.okanaganmortgages.com/blog



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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