In the new era of financial lending the Canadian government is trying harder than ever to control Canada’s debt load in order not to repeat what happened in the USA last year. As credit has become more and more abundant in our society, your credit report, and thus your credit rating, has become more important in your daily life. Your credit rating affects all aspects of your financial activities when it comes to borrowing money. Your credit rating also has the ability to affect the job you get, the apartment you rent, and even the ability to open a bank account. Your credit report itself is simply a listing of all of your mortgage and consumer debt.

There are two major credit reporting agencies in Canada, Equifax and TransUnion. An account with usually both these credit reporting agencies is created when a consumer applies for credit. Every time you borrow money, or make a payment on a loan or credit card, the lender then reports the information about the transaction to these two agencies. There are very few situations in which the extension of credit to a consumer does not result in a report going to the credit reporting agencies.

The credit reporting agencies then track all the credit information reported to them and thus create the consumer’s credit profile. The credit information collected reflects the amount of credit an individual has accumulated, minimum amount of payments, the regularity of payments, any missed payments, credit judgements against them, etc. The information on your credit report varies based on your creditors and what they have reported about you. Potential lenders and others, such as employers, view your credit history as a reflection of your character. Whether we like it or not, our financial habits have a lot to say about the way in which we choose to live our lives. The credit report also lists their employer, or if self-employed, occupation, address, date of birth and social insurance number, who has extended the credit, to whom the consumer has requested credit from, and often any former names  or aliases.

Since Equifax is used most commonly by brokers, I will refer primarily to the BEACON SCORE. TransUnion refers to their calculation as IMPERICA; beacon score makes more literal sense – in my mind! The assessment of the consumer’s credit worthiness by the credit reporting agency is based on statistics and various calculations that are translated into a credit score. A credit score is a risk assessment. It is a prediction of the consumer’s probability or likeliness to default on a debt over a 2 year period. The lower the credit score, the higher the risk of default. GOOD NEWS, your credit report is a working document and you repair any damaged credit over time to increase your beacon score. A beacon score can range from 300 to 850. Creditors usually interpret the score as follows:

680 – 850: good to superior credit

600 – 679: average to good credit

570 – 600: below average credit

Below 570: poor credit

There are 5 main factors that influence the beacon score:

The mortgage products and interest rate that you qualify for are often determined by your credit score. It is important to note that a high beacon score and relatively new credit profile may not necessarily lead to a credit approval. The creditor may not view the short period of credit history as sufficient evidence of the consumer’s ability to handle debt repayment. Don’t have too many credit cards or credit inquiries as this will work against your credit profile. A mortgage consultant, such as myself, can help you obtain a copy of this report and go through it with you to verify that all of the information and help you fix any bad debt.

For any questions related to your personal credit report or mortgage inquiries, I can be reached at 604 616 2266 or mhallett@dominionlending.ca – evenings and weekends, not just bank hours and my services are FREE!

DREAM TODAY. OWN TOMORROW.

If you’re self-employed, you may have a more difficult time obtaining financing for your real estate purchases than you encountered just 18 months ago thanks to the recent recession. And as of April 19^th, 2010, Canada Mortgage and Housing Corporation (CMHC) raised the required down payment amount, as well as decreased the percentage at which you can refinance an existing mortgage if you’re self-employed. To add to the confusion, there are also new rules for those who have been self-employed for more than three years.

Still, if you can prove your income, show you’re up-to-date on your taxes and you have solid credit, and have a good credit history your chances of being approved for a mortgage are greatly improved.

There are essentially two types of self-employed or business-for-self (BFS) borrowers – those who can prove their income and those who cannot, and must instead use a stated-income mortgage product. But, if you have been self-employed for more than three years, you can no longer use a stated-income product.

By providing the required documentation, you’re much more likely to be approved for a mortgage if you qualify based on your income. The trouble is that if you cannot prove your income, you pose a higher risk in the eyes of lenders.

CMHC currently offers default mortgage insurance for people who have been self-employed less than three years through a stated-income mortgage product up to 90% loan to value (LTV) – meaning the down payment can be as low as 10% of the purchase price. But prior to April 19^th, 2010, the maximum LTV for self-employed individuals was 95% for purchases – meaning the down payment would have only been 5% instead of the current 10%.

And if a BFS individual wishes to refinance an existing mortgage, the maximum loan amount was reduced to 85% from the previous 90% of the home’s value.

Regardless of the maximum LTV, however, the income amount you are stating has to make sense based on your occupation. This is important, because the chances of finding lenders to fund this type of deal are significantly boosted if the mortgage is insured.

Lenders and insurers are well aware of the tax write-offs that BFS borrowers can leverage, but these deals are accepted or declined based on average incomes for specific fields, as well as your credit rating. It pretty much goes without saying that those with credit blemishes will have a tough time obtaining mortgage financing if they’re self-employed.

Getting Pre-approved

While BFS mortgage financing is viewed on a case-by-case basis, if you work with a licensed mortgage professional to obtain a pre-approval, you can be confident you have access to mortgage financing and you will know how much you can spend before you head out shopping for a property. It’s important to note, however, that there is a significant difference between being pre-approved and pre-qualified. In order to obtain a pre-approval, the lender fully underwrites the deal whereas, with a pre-qualification, only the most basic details are considered. Remember that many banks will only issue a pre-qualification.

Should a pre-approval and/or mortgage default insurance be unobtainable, the maximum mortgage amount you are likely to qualify for is between 50% and 75% – meaning you will need a much larger down payment.

Alternative financing

If you do not qualify for traditional financing all is not lost, since you may be eligible for alternative or private funding.

Mortgage professionals such as myself have access to private investors who are willing to lend money to BFS individuals looking to obtain mortgages. Although you will pay a higher interest rate – on average about 12% – this route may enable you to acquire funds to purchase a home. It’s also important to note that there are added fees involved with private funding because the deals involve a higher degree of risk. The combined lender/brokerage fee will depend on the specific deal and the risk it poses, but the figure will be disclosed upfront so you know exactly what you’ll be expected to pay for these services.

Another key point to consider is that private financing is equity based, meaning that the lender’s decision will be based on a specific piece of real estate. Private lenders want to know that the property is marketable and that they will be able to easily sell it should the mortgage go into foreclosure.

Just remember, no matter what your financial circumstance is, I can help you find the lender.

DREAM TODAY. OWN TOMORROW.

We live in a society of instant gratification. Unlike our parents or grandparents – who saved up for larger purchases – we are often tempted to splurge on bigger-ticket items simply because we have a debit card in hand when we head out “window shopping”. And aside from overspending thanks to the advent of debit cards, consumers are also more likely to dip into overdraft, which ends up costing more thanks to fees and interest that banks charge whenever you spend more than you have in your account.

Basically, a debit card works like a cheque. The only difference is that every time you use it, you’re immediately taking money out of your account. That’s why when you overdraw it’s like bouncing a cheque – only worse because, unlike cheques, you probably don’t keep a record of every debit card purchase you make. You may even make a bunch of small purchases before you realize you’ve spent more than you have. So before you pay for that coffee or lunch purchase with your debit card, make sure you have enough money in your account to cover it.

Revert to using cash for daily expenses, cash controls spending…plain and simple! Using cash to pay for everyday purchases such as coffee, transit, lunch and magazines alerts you to the idea that you’re actually spending real money. You just don’t get the same cautionary sense when you haul out plastic, be it a debit or credit card. There’s a distinct cognitive event that happens when you handle money – it’s called awareness. Over the counter goes the five dollar bill and back comes a loonie, a dime, two nickels and four pennies.

Did you just add up the change above to determine how much money you have left? Did you think about what that purchase could have been? You see, you are much more conscious of this imaginary purchase than if you had paid with plastic.

Now, add in the awareness of the bills left in your wallet and you become attuned to your temporary wealth, or lack thereof. At the end of the day, what encourages or cautions many consumers about spending is knowing where you stand from a financial perspective. That’s why cash can help control spending. Using cash to pay for everyday purchases alerts you to the idea that you’re actually spending real money.

By allotting yourself a weekly cash allowance for entertainment and everyday expenses – such as that daily morning coffee or weekly movie – you are building a budget around what you can spend on these purchases. And once the money in your wallet has been spent, you have to ensure you fight the urge to withdraw more cash or resort back to using your debit card. Be realistic about what you typically spend on these items in a week. If you routinely eat out for lunch or stop at Tim Hortons for coffee, count that as well. If you think you’re spending too much on these items, you can then decide to find a less expensive alternative, such as brown-bagging your lunch or making your own coffee.

Let’s say, for instance, that you start the week off with $50 in your wallet and you began to spend it on your purchases. You will see $50 turn into $40, $40 turn into $25, $25 turn into $15 and so on. Every time you look into your wallet, you will see what’s left over from your original $50 and be aware of how quickly your money is being spent. This alone can make you think twice before making a purchase.

Budgeting will help you save for your down payment for your new home.

Selecting the length of your mortgage amortization period – the number of years it will take you to become mortgage free – is an important decision that will affect how much interest you pay over the life of your mortgage.

While the lending industry’s benchmark amortization period is 25 years, and this is the standard that is used by lenders when discussing mortgage offers, and usually the basis for mortgage calculators and payment tables, shorter or longer timeframes are available – to a maximum of 35 years.

The main reason to opt for a shorter amortization period is that you will become mortgage-free sooner. And since you’re agreeing to pay off your mortgage in a shorter period of time, the interest you pay over the life of the mortgage is, therefore, greatly reduced. A shorter amortization also affords you the luxury of building up equity in your home sooner. Equity is the difference between any outstanding mortgage on your home and its market value.

While it pays to opt for a shorter amortization period, other considerations must be made before selecting your amortization. Because you’re reducing the actual number of mortgage payments you make to pay off your mortgage, your regular payments will be higher. So if your income is irregular because you’re paid commission or if you’re buying a home for the first time and will be carrying a large mortgage, a shorter amortization period that increases your regular payment amount and ties up your cash flow may not be the best option for you.

I will be able to help you choose the amortization that best suits your unique requirements and ensures you have adequate cash flow. If you can comfortably afford the higher payments, are looking to save money on your mortgage or maybe you just don’t like the idea of carrying debt over a long period of time, we can discuss opting for a shorter amortization period.

Advantages of longer amortization

Choosing a longer amortization period also has its advantages. For instance, it can get you into your dream home sooner than if you choose a shorter period. When you apply for a mortgage, lenders calculate the maximum regular payment you can afford. They then use this figure to determine the maximum mortgage amount they are willing to lend to you.

While a shorter amortization period results in higher regular payments, a longer amortization period reduces the amount of your regular principal and interest payment by spreading your payments out over a longer timeframe. As a result, you could qualify for a higher mortgage amount than you originally anticipated. Or you could qualify for your mortgage sooner than you had planned. Either way, you end up in your dream home sooner than you thought possible.

Again, this option is not for everyone. While a longer amortization period will appeal to many people because the regular mortgage payments can be comparable or even lower than paying rent, it does mean that you will pay more interest over the life of your mortgage. Still, regardless of which amortization period you select when you originally apply for your mortgage, you do not have to stick with that period throughout the life of your mortgage. You can always choose to shorten your amortization and save on interest costs by making extra payments when you can or an annual lump-sum principal pre-payment. If making pre-payments (in the form of extra, larger or lump-sum payments) is an option you’d like to have.

It also makes good financial sense for you to re-evaluate your amortization strategy every time your mortgage comes up for renewal, at the end of each term of your mortgage. That way, as you advance in your career and earn a larger salary and/or commission or bonus, you can choose an accelerated payment option (making larger or more frequent payments) or simply increase the frequency of your regular payments (ie, paying your mortgage every week or two weeks as opposed to once per month). Both of these features will take years off your amortization period and save you a considerable amount of money on interest throughout the life of your mortgage.