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Mortgage Primer for the Credit Challenged |
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Mortgage Broker (BC)
Direct Line: (604) 506-0397 Fax: (604) 628-3798 Toll free (Canada) : 1-800-504-5886 Vancouver, Burnaby, Surrey email: johnso@bcmortgage.ca
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If you’ve had serious credit problems, you may think that no one will give you a mortgage. You may have gone to your bank or credit union and have been told just that. You may not know that there are lenders that specifically lend to individuals in your situation. These are “non-traditional” lenders and they understand that people sometimes get into situations that cause them to impair their credit. These lenders are able to provide temporary financing until the time you can access traditional financing.
Since non-traditional lenders target a higher risk market, their requirements differ from that of your bank or credit union. You need to be familiar with these requirements so that you can package your application in the best possible light. This will improve your chances of obtaining a mortgage and obtain the best possible interest rate.
Whether you are buying today or 2 years down the road, we suggest that you take the time to read this document. When the time comes to make the most important purchase of your life, we want you to be ready.
This guide is provided for informational purposes only. You still need to discuss your specific situation with your mortgage broker. We are happy to consult with you at your convenience. Our clients are located in Vancouver, Richmond, Surrey, Burnaby and all over British Columbia (BC).
What do lenders look for in a mortgage application?
Here are the main criteria that non-traditional lenders consider when evaluating your application:1) Down payment / Investment2) Income3) Credit and the reason you got into your situation4) PropertyDown payment
The down payment is a major consideration for lenders. The larger the down payment the lower the loss the lender will incur should they have to foreclose on a property. The down payment is also a reflection of your stake in the property. A larger investment means that you are less likely to walk away from the property should the value of the property decline for whatever reason.Most lenders prefer to see that your down payment is from your own savings. While some lenders will accept a gift from a relative, it is preferable that you show a gradual increase in your bank balance every month. This proves to the lender your ability to save money.
Lenders will want proof that you have the funds for the down payment/closing costs and that it is not borrowed. You will need to provide the past 3 months bank or investment statements to the lender showing the required funds. Any significant increases in your bank balances must be explained since lenders do not want you borrowing your down payment.
Income
Lenders are expecting to see evidence of income stability. Typically, for a salaried individual, the lender will require you to provide a job letter and a recent pay stub. Some lenders will want you to prove that you’ve been in the same industry or even the same job for at least 2 years.If your income varies from year-to-year (e.g., you are self-employed, receive bonuses or overtime), lenders will want to look at your income for the past 3 years. If your income is rising, lenders may take a 3-year average. If income is declining, the lender may take the last year to qualify you. Be sure to explain to your mortgage broker any unusual fluctuations in your income.Depending on the lender and your situation, the following documents may be required:
1) Job letter (click on http://www.bcmortgage.ca/forms/Salary_Letter.doc to see a sample)
2) Pay stub (not older than 30 days)
3) Past 3 years T4s
4) Past 3 years Notice of Assessments (NOA)
5) For self-employed: Past 3 years T1 General or financial statements
Be aware that lenders carefully review all income documentation. They all have to be consistent. For example, if your job letter states that you make $2,000 per month but your pay stub shows you were paid $600, you will have some explaining to do. You can also expect them to phone your employer to verify the information. Non-traditional lenders will not survive long in this market if they are not thorough in their review of your application.
If there has been something unusual about your situation, you are better off disclosing it up front to your mortgage broker. It could be that you were laid off for a while, or on maternity leave, or took a 6-month holiday. All of these explanations are understandable. However, if this information is not disclosed up-front, your application could be delayed or even declined.
Credit
You should obtain a copy of your credit bureau from Equifax (www.equifax.ca) and Transunion (www.tuc.ca). By law, you are entitled to a free copy of your credit report. Unfortunately, the free copy does not contain your credit score. Since many lenders use the credit score to determine whether you qualify for credit, we suggest you pay the small fee to obtain your score.When you receive your credit report, the first thing you need to do is to check for errors. There may be collections on the bureau that you’ve already settled but still recorded on the bureau as unpaid. Make sure that you have these corrected. If you’ve been through a bankruptcy, it may be that some of your previous creditors failed to update the information in the credit bureau. Correcting errors could have a significant impact on your credit score. Since many lenders base the pricing on the credit score, you could save money if you are able to increase your credit score.
Be aware that it takes several weeks before the credit bureaus update your information. Therefore, the sooner you can update your information, the sooner your credit score will improve.
What do lenders look at in the credit bureau?
1) Credit score
2) Delinquencies - How many times did you miss payment and for how long were they left unpaid
3) Any derogatory items (e.g., collection items, judgments)
4) Length of time on the bureau (how long have you been in the bureau)
5) Number of trade lines (e.g., credit cards, lines of credit, auto loans, etc.)
6) How long have you had your trade lines
Credit score
Your credit score is the single most important tool used to gauge your creditworthiness. It statistically predicts the probability of the applicant going bankrupt within the next 24 months. Credit scores range from 300 – 900. The higher your score the better.If you’re credit score is below 600, you may not qualify for a traditional mortgage. You may still qualify for a mortgage with a non-traditional lender. Be prepared to pay a slightly higher interest rate. If you are not in a hurry to purchase, I can help you to bring your credit score so that you can qualify within six months to 1 year.
If your score is between 600 and 640, it still may be possible to obtain a traditional mortgage provided there are other strengths in the application. Many banks will not find your credit acceptable. We do have lenders that can still provide triple A rates with this credit score.
So, what determines your credit score? Your credit score is determined by the following factors:
1) Previous credit (whether debts were repaid on time) - 35%
2) Level of indebtedness - 30%
3) Amount of time credit has been used - 15%
4) Pursuit of new credit - 10%
5) Types of credit - 10%
A higher credit score will lower your interest rate. Here’s what you need to do to improve your score:
1) Pay your bills on time
2) Keep low balances on several credit cards (i.e., less than 30%) and never exceed your credit limit
3) Limit the number of inquiries to your file
4) Do not “credit surf”. Opening new credit accounts and closing old established accounts
5) Avoid finance company credit and deferred payment options offered by finance companies. These items have a negative impact on your credit score.
Bank statements
Some lenders will also require a copy of your bank statements for the past 12 months. They are looking to see whether you pay your rent or mortgage on time. The statements also indicate whether you bounce checks regularly.Mortgage history
Some lenders will want to know whether you pay your mortgage on time. They will request a statement from your current mortgage holder (if you already have a mortgage) of your mortgage history. Your mortgage history will indicate how many times you’ve missed payments on your mortgage.Your story
Your explanation for your credit situation is important, and the lender will likely require a written statement as to what brought you to this situation. You will want to tell a convincing and honest story that explains how you got into your situation (preferably something unavoidable such as an illness, business bankruptcy, etc.); what you did about it; and that you are now paying your obligations on time.Property
Lenders in this arena expect that a certain percentage of their mortgages will end up in foreclosure. You can be sure that they will carefully review all information pertaining to properties they take as security.Lenders don’t just look at the property value, as indicated in the appraisal. They look at the type (i.e., house, townhouse, condo), condition and marketability of the property. If they foreclose, they don’t want to own that property for very long. In general, lenders prefer a property that it typical of the surrounding area since these properties are easier to sell. Characteristics that the lender will consider are: (1) length of time similar properties
in the area have sold; and (2) the condition of property; (3) location of the property. Properties rated by the appraiser as “poor” or “fair” may be considered unacceptable by the lender.
Applicants from smaller communities (i.e., with population less than 25,000) will have less mortgage options since not all lenders are will be interested in financing in the area. As you can imagine, properties in larger communities such as Vancouver, Burnaby, Richmond and Surrey will have more marketability.
Purchasing a condominium? Most non-traditional lenders require a larger down payment for condo purchases. This is because condominium values tend to suffer the most during an economic downturn (at least, this is what’s happened in Eastern Canada). None of the non-traditional lenders in BC currently offer 100% financing for condo purchases.
What can you expect when you apply for a mortgage?
Interest Rate
You should not expect to receive the best rates advertised in the newspapers. These are for individuals with good credit. You need to think of this as a temporary phase for you. Rather than focusing on rate, focus on the cash requirements for the purchase, i.e., the down payment requirement and the payments. Many non-traditional lenders offer 30-year amortization periods (traditional lenders allow only 25 year amortizations), making your payments more manageable.We generally recommend that you chose a short-term mortgage, no more than 3 years. Three years will give you enough time to improve your credit so that at the term end, you can qualify for a traditional mortgage at the best market rates. After you obtain the mortgage, we will coach you on how to improve your credit situation. When your mortgage is up for renewal, we will shop around for the best rate from our traditional lenders.
Documentation
Non-traditional lenders usually require more documentation. You may initially think that their requirements to be onerous. However, it allows them to provide higher risk loans and still remain profitable.Review the section on “What do lenders look for in a mortgage application?”. This section explains the documentary requirements in more detail. Your mortgage broker will be able to guide you through the maze of documentary requirements.What if you do not have all the required documentation (or do not want to provide them)? If this is the case, we could look into placing you with a private mortgage lender. Private lenders will not require the same amount of documentation but will charge an even higher interest rate. Most private
lenders require a minimum down payment of at least 25%.
Your mortgage broker
Your mortgage broker is there to provide advice, guidance, and (to hopefully) obtain an approval for you. You should expect great service, professional advice and quick response times from your broker.Mortgage brokers will expect that you work with only one mortgage broker at a time. Chose a broker you trust and stick with that person. The time requirements to complete a non-traditional mortgage far exceed that of a traditional mortgage. In addition, the completion rate for a non-traditional deal is much lower. Your mortgage broker takes a significant amount of time from his/her busy day to help you obtain a mortgage without any cost to you. It is only fair that the broker request your loyalty.
Pre-approvals
Non-traditional lenders do not issue pre-approvals. This is because the mortgage approval depends on the type, condition and location of the property.Your mortgage broker will be able to give you some idea as to whether you meet the lender’s guidelines. Unfortunately, your broker will not be able to get you a full approval until all your documentation is submitted and accepted by the lender.
After you submit the initial documentation and you meet the lender’s basic requirements, the lender will issue a conditional approval. The conditional approval will indicate the terms and conditions of the mortgage; hold the rate for a specific number of days (usually between 60-90 days); and specify the documentary requirements. Once you receive a copy of the conditional approval, you will then need to make sure you can comply with the lender’s documentary requirements.
Subject Removal
Your purchase contract should include a “subject to financing” clause. This clause is found in most purchase agreements. Given the higher documentary requirements, you’ll want to negotiate for a longer subject removal period (at least 10 business days). If a longer subject removal period is not possible, be prepared to take a few days off so you can work on the lender’s documentary requirements.Conclusion
No matter what your situation, you have mortgage options. It may be that you qualify for a mortgage right now. It also may be that you qualify within a few months. BCMortgage.ca will provide you with advice and a strategy so that you obtain the mortgage you need at the best interest rate possible.Resources:
- Equifax's website - credit bureau
- Transunion's website - credit bureau
- Credit Counselors of BC - BC's non-profit credit counseling service (Vancouver & Surrey offices)
- Canadian Bar Association - Information on foreclosure
- Boale, Wood & Company - Involvency trustee - bankruptcy, foreclosure (Vancouver)
- D Welbanks & Associates - Credit counselling (Vancouver, Richmond, Burnaby, Surrey)
- Office of the Superintendent of Bankruptcy, Government of Canada
"My job is done when you know your options"
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