Beware of credit vandals

Have you seen the movie Identity Thief?

The trailer is possibly one of my favourite movie scenes ever (Melissa McCarthy singing in the car). The movie is pretty cheesy, but the message sure hits close to home.

When I take a mortgage application I usually have a pretty good idea what the clients’ credit scores will be.

I started working with a couple (lets call them Bob and Lynda) in Langley mid November. When I pulled their credit reports I was shocked to see that her score was 623.

I had expected it would be in the high 700s.

For perspective, 680 (or higher) is the score that mortgage insurers and lenders are looking for. The lender I was wanting to work with for this couple would only consider scores 650 or higher.

This was a hard stop.

I called the clients. We went over her credit report item by item.

It turned out that there were multiple applications for credit starting in August. There was a new cellphone showing three months in arrears, and a new credit card that was showing two months in arrears and over limit.

There was also a flag on Lynda’s credit bureau that clearly stated her credit had been compromised in the past, and before any new credit was approved lenders needed to call her cell directly to confirm it was a legitimate application.

Lynda was far calmer about it than I expected. She told me the story of what happened when her identity was stolen the first time. It was a nightmare, but it did get sorted out.

At the time, she had searched the new address on the fraudulent credit and discovered numerous complaints by other victims about the same address. It seemed like home base for a very busy group of criminals.

Second time around, Lynda contacted the cell provider and the credit card company right away. Both issues were dealt with promptly and notes were made on her credit bureau.

I pulled her credit bureau again early this week and her score had jumped to 792. Although frustrating, at least she was able to sort this out quickly.

This experience was unsettling for me. I’ve known Bob and Lynda for many years, and they have always been careful with their finances and personal information.

The start of a new year is a great time to do a thorough review of your financial situation. Take some time to look over your budget and plans.

Book time with a financial adviser to either review your investments or talk about how you can start a savings plan.

Review your mortgage and think about ways to pay it off sooner.

I also suggest you take a few minutes to pull your credit report and go over it to make sure everything is OK.

Based on Lynda’s experience, if your credit has been compromised in the past, I suggest you check your credit every three or four months, or right away if you receive calls from lenders that someone has made an application in your name.

Taking the time to review your credit history may save you time and aggravation down the road when you apply for credit.

For the link to check out your credit score, as well as tips for improving your credit, check out our article Improving Your Credit Score 

Happy New Year!


Take charge of mortgage

A friend just sent me a screen shot in Messenger. It took me a minute to figure out what it was.

The screen shot was a transaction list of her mortgage payments.

Early in the spring, she told me her goal was to get her mortgage balance under $100,000 by the end of the year. The screen shot finished with her most recent payment, which brought her mortgage balance under the magic number.

When she first shared her goal, we sat down over a coffee and played with some numbers. I ran scenarios so she could see what would happen if she increased her payment every month as compared to if she made lump sum payments.

We had a conversation about how she handles her finances. She felt that she would be more successful making extra payments if she increased her payment amount. This way, she would be obligated to make the higher payments.

People handle their finances differently. Income varies from industry to industry. Expenses can vary over the course of the year.

Most mortgages offer several pre-payment options (without penalty) to allow you to pay off your mortgage ahead of the scheduled amortization. Pre-payment options can include lump sum payments, double-up payments, or a combination of the two.

For a quick overview of pre-payment options, read How Do I Pay My Mortgage Off Sooner? 

If you are thinking that you would like to tackle your mortgage balance a little more aggressively, there are a few steps I recommend.

  • Take a look at how you have spent your money over the last few months.
  • Are you able to save money from month to month?
  • Is your savings account balance growing steadily, staying the same, or decreasing month over month?
  • Do you have lump sums coming to you (ie: annual bonus)?
  • Does your income vary or is it consistent every month? Have you had a significant increase in income?
  • Do you have the opportunity to take on extra work to increase your pay?

If your income has increased and you are saving money, it may be a great time to make extra payments on your mortgage. If you have extra money coming throughout the year, it might be smarter to make lump sum payments when the money arrives as opposed to making higher payments each month.

Using a mortgage balance of $350,000 and rate of 3.29 per cent, your initial payment would be $1708. If you increased your monthly payment by $100, you would pay your mortgage off 2 1/2 years sooner.

An increase of $100 a month may seem a little daunting. How about starting by increasing your monthly payment by $25 the first year? You will adjust your budget — maybe fewer coffees out.

Most likely you won’t even feel the increased payment.

Take stock after a few months or a year and make another small increase. It may not seem like much, but over the amortization of your mortgage small changes will add up to big interest savings for you.

Another way you can accomplish this is to switch from monthly payments to accelerated weekly or bi-weekly payments. The accelerated payment frequencies are calculated a little differently to pay more against your principal every payment.

Again using $350,000 at 3.29 per cent, your regular bi-weekly payment would be $788.13.

The accelerated bi-weekly payment would be $854.44. This is a difference of $66.31 every two weeks.

By choosing the accelerated payment, at the end of your first five-year mortgage term you would have 17 years remaining as compared to 20 years with a monthly or regular bi-weekly payment.

So where does the take charge of your mortgage part come in?

Many lenders have Customer Portals that allow you to sign in and play with calculators to see how extra payments will affect your mortgage balance and remaining amortization.

Some of these portals also allow you to make additional payments yourself without having to call the lender or go in to a branch.

If your lender doesn’t offer a customer portal for you to manage your mortgage yourself, setting an annual appointment with your lender to review your mortgage is a wise idea. Another time to do this is when your mortgage comes up for renewal.

OK, that’s enough heavy stuff.

Wishing you and your loved ones a wonderful holiday season filled with much love and laughter, and safe travels if you are heading away for the holidays. I’m looking forward to time spent with family.


Mortgages for self employed

During the last few weeks, I’ve been working on mortgages for two self-employed people.

Neither application was cut and dried. Documentation made all the difference for both files.

The first client (let’s call him Zach) was a realtor. He bought a home with a rental suite earlier this year as he and his wife were separating. Six months later he was back and wanting to buy the townhome he had previously been living in with his ex-wife as per their separation agreement.

His income is strong and the numbers work well with the home he bought in June rented out. The application qualified with room to spare under the new stress test rules.

He was moving back into the townhome.

The first two lenders I approached were not interested in the application despite the overall strength of the file. They couldn’t wrap their heads around why he would want to downgrade (their perception) back to the townhome after purchasing a nicer home.

In this particular case, he had done extensive renovations to the townhome and loved the location. It had been home for many years and he wanted to stay. It worked well for his business and he wanted to stay near the downtown core.

Why would lenders be concerned?

In this case, they felt that he was trying to buy the unit as a rental and circumvent the requirement for 20 per cent down payment. They had a tough time believing that he would indeed be moving back in to the townhome.

Their other concern was the length of time he had been self-employed. Zach was coming to the end of his third year as a realtor. This meant that he had two tax returns with business for self income, but the first year was very low.

With self-employed clients, one of the ways we determine income is to average reported income from the previous two years. In Zach’s case I was able to find a lender that also considered his year to date income, even though he won’t be filing his return until the new year.

Zach was able to provide a copy of the strata regulations which confirmed that rentals are prohibited in the complex. With this information in hand, we were able to find a lender that provided the mortgage product he was looking for.

The second file was a little more complicated.

Grant is in his mid-20s and is a self-employed painter. He has been working as a painter since he was 19 and is a very careful saver. He had almost $30,000 saved for his down payment.

The twist for him is that he decided to start his own business at the beginning of 2018.

When I initially took his application, I told Grant that we might not be able to find a lender that would support the file in his name alone due to his limited time in business.

We ended up adding Grant’s father to his application, with the intent of removing him in two or three years once Grant has established a track record of business income.

Both of these clients were a little frustrated with how much documentation their lenders required to approve their mortgage applications.

I’m not sure of the actual figures, but I have heard that the number of new businesses that fail within the first three years is significant. I believe I heard it is somewhere in the neighbourhood of 75-80 per cent.

As an example, I heard at a seminar that the attrition rate for new mortgage brokers and realtors is 85 per cent by the two-year mark.

Lenders do not want to foreclose on homes. They want to collect interest on the mortgage funds they lend out.

For newly self-employed borrowers, most lenders will be looking for either a larger down payment or a co-borrower to add strength. This is not a reflection on you as a borrower, but based on historical trends. They want to make sure you will be able to make your mortgage payment for years to come.

I was able to find A lenders for both of these clients.

There are lenders in the B world that offer specialty mortgages for self-employed clients that don’t qualify based on their reported income but have strong business income, significant down payments, and squeaky-clean credit.

Some people stay in the same line of work but choose to go the self-employed route to allow for more flexibility and balance on the personal side.

There are several important take-aways here if you are wanting to buy a home and are newly self-employed.

First, be meticulous with your paperwork. Make sure your taxes are filed and paid. If your business has a cash element to it, deposit the cash to your bank account. Some people may not in an effort to keep their taxes low, but the down side for mortgage purposes is that lenders aren’t able to see your true income.

Second, be open to options. Adding a co-borrower may not be the route you prefer to go but may be what you need to be able to buy a home now rather than waiting until you have a few years of reported business income under your belt.

Maybe considering a B lender who is more open to self-employed individuals is the right fit.

Most importantly, is the timing right? If your business is not well-established, would it be wiser to wait a little longer before buying a home? Each situation is different, so this a question only you can answer.


Porting your mortgage

I’m working with a couple (let’s call them Ken and Barb) who are relocating to B.C. from Saskatchewan. They bought their first home just over two years ago, so they are in the middle of their mortgage term.

When Ken and Barb bought their home, we had a conversation about plans for the future. Their intent was to stay in Regina, close to family. I looked at several different lenders and ruled out a few offering rate specials because those rate specials came with restrictive terms for early payout.

Even though Ken and Barb told me they planned to stay put, Ken was head-hunted by a recruiting firm and offered a position in the sunny Okanagan. The new position involves a significant raise and the opportunity for them to be closer to medical specialists their son needs to see regularly.   

Statistics show that two out of three Canadians break their mortgages by the 33-month mark. When I use the term break, I mean that people either sell or refinance their home, which means they pay out the original mortgage.

Because of this statistic, one of the features I look for when placing clients with different lenders is a portability option.

What does porting your mortgage mean?

Porting your mortgage essentially means that you transfer the conditions of your current mortgage when you sell, to a new mortgage when you buy again.

This means you take the current interest rate, remaining term, and amortization to your new property.

Most times the amount does not line up exactly, and often there may be a difference in dates.  Each lender handles this slightly differently.

Many lenders will allow a window of time for you to take advantage of this feature if you do not buy right away. You will likely have to pay your penalty in full if the new mortgage does not close at the same time.

The penalty is then rebated back to you if you sign for a new mortgage within a certain time frame (usually about three months).

I reached out to Ken and Barb’s current lender this morning. Based on their mortgage, if they were to pay the mortgage in full today they would be looking at a penalty of almost $3,000.

Because we went with a lender who offers portability, we will be porting their mortgage to the new home in B.C. This is a double win, as their interest rate of 2.24 per cent is fixed for another three years. There will be no penalty involved as they are borrowing almost the exact same amount of money.

If you are comparing interest rates and see rock-bottom rates, it is important to review the conditions of the mortgage. Sometimes a lender will offer two rates only .05 per cent apart. The lower rate is often a low or no-frills option, which means that portability may not be an option or that your pre-payment privileges are reduced.

Sometimes the lower rate options will not allow you to break your mortgage unless you sell your home.

Another situation I ran into last week involved a client who opted for a cash-back mortgage.

With the cash-back mortgage, their lender credited them with additional funds at the time their new mortgage was advanced. For some clients this works well.

The cash could be used for updates or improvements to their new home, or to pay off debts like loans or credit cards.

In this case, they received $25,000 when they bought their home. As they bought a slightly dated home in a great neighbourhood, they were able to use this money to do updates and renovations.

At the time, they asked their banker if they would be able to port their mortgage. They had moved to Kelowna from Ontario and intended to move back to Ontario within a few years. They were assured that it would be no problem to port the mortgage to a new property in Ontario.

What they weren’t told, and learned the hard way, was that if they broke the mortgage before their five-year term was up, they would have to repay every penny of the cash-back amount.

It didn’t matter that they had already made four years’ worth of payments on the mortgage.

Mortgage documents involve a lot of fine print. When you are caught up in the excitement of buying your home it is tempting to skip or not read everything thoroughly.

Pre-payment terms are clearly laid out for you in your mortgage commitment. The mortgage commitment is the initial document from your lender that outlines all of the terms and conditions you are signing for.

Working with a mortgage professional is important. Buying a home is one of the largest financial commitments most people make.

What is equally important is to be aware of what you are signing. The lowest rate is not always the best option in the long run.

More The Mortgage Gal articles

About the Author

Tracy Head and Laurie Baird help busy families find mortgage solutions. Together they have more than 45 years of experience in the mortgage industry.

With today’s increasingly complicated mortgage rules, Tracy and Laurie spend time getting to know the people they work with and help them to better understand the mortgage process. They support their clients before, during, and after their mortgage is in place.

Tracy and Laurie work closely with their clients, offering advice and options. With access to more than 40 different lenders, Tracy and Laurie are able to assist with residential, commercial, and reverse mortgages in order 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 their blog at https://www.okanaganmortgages.com/blog


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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