What Happens When You Can’t Qualify For A Mortgage!?

If your mortgage application has been declined, it’s probably due to low income, too much debt or bad credit. Here are some ideas of what you can do if you’re getting declined:

Low income: if the bank tells you that you can’t afford a particular mortgage amount because of your income, it’s for good reason; you won’t be able to afford the payments. Try the following:

■Lower your mortgage expectations by shopping for a cheaper home
■Start making more money
■Put more money down. A bigger down payment means a smaller mortgage
■Get someone to co-sign the loan with you. If you know someone who’s willing to back your loan, you can
have him or her sign with you on the mortgage as assurance to the bank that at least someone has the ability to make the payments.

Too much debt: a large chunk of what the bank believes you can afford is based on the credit that is available to you. So, for instance, if one person has a MasterCard (with a balance) with a credit limit of $5,000 versus someone with three credit cards (no balance) with credit limits totalling $15,000, the person with the MasterCard (with a balance) is considered to be less of a default risk. This is because the person with the $15,000 limit has the potential to utilize all that credit. Here’s what you should consider doing if you’ve got too much available debt:

■Slowly begin to consolidate consumer debt to reduce your overall available credit. Cancel unused credit cards (keep the one with the best and longest credit history), transfer balances and ask the lender to reduce the credit limit or both.
■Focus on paying down consumer loan balances quickly. The faster you get rid of your consumer debt, the more available income you’ll have to allocate toward a home.

Bad credit: before you enter into the application process, review your credit report. To ensure your credit file has accurate information, check on it every year. You can order your credit report online or by mail through Equifax Canada Inc. or TransUnion Canada Inc.
If there’s an error on your report, send a written request (with official receipts and paperwork supporting your side of the issue) to the credit bureau, which will investigate. If the error turns out to be incorrect, the credit bureau must correct it and send out revised reports to the lender you are trying to get a mortgage from.

If you’ve been late on payments, missed payments, not repaid a loan or have declared bankruptcy, you’re going to have a tough credit rating to face. Here’s what you can do: be responsible and wait it out. Make your payments on time, don’t miss payments and don’t ignore your debts. If you’re struggling with keeping up, see a credit counsellor who can help you negotiate new terms with your lenders.

Debt Consolidation Mortgage

High interest debt on credit cards, auto loans, or other consumer loans can be difficult to pay off and may create a barrier to your financial goals. However, if you’re a homeowner with equity, you have additional options to help you manage your debt, including a debt consolidation mortgage and home equity loan or line of credit.

Refinance with a debt consolidation mortgage

As a homeowner, one way to start managing some of your higher-interest debt is to refinance your existing mortgage with a debt consolidation mortgage. For example, a Home Power Mortgage allows you to borrow additional money on your mortgage so you can consolidate your debts into one simple payment. That way you can easily budget with a structured payment plan and an assured pay-off date.
Find a mortgage that’s right for you using our mortgage product selector.

Debt consolidation home equity loan or line of credit

Homeowners who are looking to consolidate their debts have the option of using their home equity to secure a loan or line of credit. A home equity loan or line of credit allows you to obtain a lower interest rate and a higher credit limit by using the equity you’ve built in your home as security. By consolidating your debts into a home equity loan or line of credit, you’ll have the convenience of one consolidated payment rather than having several bills from different creditors. This makes bill payments more manageable and the rate is usually lower, helping you pay off your debts sooner. With a home equity line of credit such as a Home Power Plan, you’ll enjoy additional benefits such as making interest payments only on the funds you use, not your total credit limit, and having ongoing access to funds up to your authorized credit limit.

Benefits of debt consolidation mortgages and debt consolidation home equity loans or lines of credit

• Interest rates on mortgages and home equity loans or lines of credit are often much lower than those on credit cards and consumer loans
• Making a single payment to your debt consolidation mortgage or home equity loan or line of credit is much easier than making multiple payments to credit cards and other lenders

Mortgage Refinancing and Home Equity

Mortgage refinancing offers many benefits, from getting a better interest rate to lowering your regular payment. One of the most popular reasons why people refinance is to access their home’s equity to serve as collateral for a home equity loan or line of credit.

Find out if mortgage refinancing is right for you by contacting your mortgage professional.

Home equity vs. mortgage?

When you start the process of refinancing, you might become confused by all the different terminology. Mortgages and home equity are directly related to each other, but aren’t the same.

Home mortgage: Loans secured by your house and paid in installment's based on the period of time as determined by yourself and the lender. The mortgage secures your promise to repay the home mortgage.

Home Equity is the difference between your home's fair market value and the outstanding balance of the mortgage. In other words, it’s the amount you have already paid against the value of your house. Therefore, your property's equity increases as you make more mortgage payments.

What are home equity loans and lines of credit?

Mortgage refinancing allows you to use the home equity you’ve established in the form of home equity loans and lines of credit, available for home improvements, college tuition, major purchases, etc.

Determine how much equity is available in your home with our home equity calculator.

A home equity loan is a secured loan paid in one lump sum based on the amount of equity you have in your home. Your home is used as collateral for such loans.

A home equity line of credit can be combined with a mortgage under a Home Power Plan. Rather than giving you the loan up front in a lump-sum, you’ll have ongoing access to funds through a line of credit. As you pay down your mortgage each month, you build equity in your home which automatically increases your line of credit amount up to your Home Power Plan limit.

It’s important to take into account factors such as interest rate and how long you plan to remain in your home before deciding if a home equity loan or Home Power Plan is right for you.

Making the Offer

Making the Offer

You thought this day would never come. You've found the perfect home. Now you're ready to make your offer.

Once accepted, an Offer to Purchase is a legally binding agreement between you and the vendor. Along with your mortgage agreement, this is one of the most important documents you'll sign.

It locks you into the conditions of the purchase, so make sure your interests are protected by discussing your Offer to Purchase with your lawyer or notary prior to signing.

Checklist: What to include in your home offer

Your proposed purchase price.
A list of items in the house (called chattels) to be included in the purchase price. For example, appliances, window coverings, and certain furniture items might be negotiated into the purchase price.
Amount of your deposit.
Financial details. For example, how the balance of the purchase price will be paid.
Closing date. This is the date you will take possession of the house (usually 30 or 60 days from the date of the agreement).
Time period for which the offer is valid.
Conditions of the offer. You might want to make your offer conditional on arranging for financing, a building inspection, or the results of a survey. Make sure the offer can be cancelled if any of your conditions are not met and always put a time limit on the conditions. Keep in mind that a firm offer – one with no conditions – is usually more attractive to the vendor. But remember that you need to feel comfortable with the offer yourself. Your Realtor will be able to advise and guide you through this important process.

Your home offer is accepted

Congratulations, once your Offer to Purchase is accepted, it's time to contact a mortgage advisor.

Reminder: You will need a cheque, bank draft, or money order to accompany your Offer to Purchase as a deposit.

Start Saving For Your Down Payment

For many first-time homebuyers, saving what's required for a down payment can seem overwhelming. However, sometimes saving for a down payment is as simple as managing your budget differently.

You can start saving for your down payment:

By setting aside money each month just as you would a regular mortgage payment

By opening an RRSP Regular Investment Plan to help you save tax free

With a cash gift from a parent or relative

I can help you with a strategy to reach your goal of buying your first home sooner.

Using your RRSPs to buy a home

If you qualify as a first-time homebuyer, you may be eligible for the government's Home Buyers' Plan (HBP). This allows you and your spouse or partner to withdraw up to $25,000 each from your Registered Retirement Saving Plans (RRSPs) to add to your down payment or to cover purchase-related costs.

Best of all, you don't have to pay income tax on the funds, as long as you repay the total amount to your RRSP over the next 15 years. The repayment period starts the second year following the year you made your withdrawals. If the full $25,000 is withdrawn, the minimum annual repayment would be $1,666.

For more information on the Home Buyers' Plan, please visit the Canada Revenue Agency website.

http://www.cra-arc.gc.ca/E/pub/tg/rc4135/rc4135-e.htm

Mortgage Basics 101

A mortgage is a loan that uses a property as security to ensure that the debt is repaid. The borrower is referred to as the mortgagor, the lender as the mortgagee. The actual loan amount is referred to as the principal, and the mortgagor is expected to repay that principal, along with interest, over the repayment period (amortization) of the mortgage.
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A mortgage can be used for financing many different things, including:

    Purchasing or constructing a new home
    Purchasing an existing home
    Refinancing to consolidate debts
    Financing a renovation
    Financing the purchase of other investments
    Financing the purchase of investment property

Since a mortgage is a fully secured form of financing, the interest you pay is usually less than with most other types of financing. Many people use the equity in their homes to finance the purchase of investments. Using a Secured Line of Credit, or a fixed-rate mortgage, the interest costs are lower, and they can even write off those interest costs against their taxable incomes.

The Application Process

Chances are you’ll spend that initial meeting nervously waiting for the lender to approve you. You give the lender all of your information and they spend some time inputting that into a computer. Then you give them the information on the house you’re buying. At some point the lender pulls your credit report as well. If the lender likes the information, the borrower is approved. If not, borrowers are rejected and they probably cry. At least, that’s what I would do.

After that initial approval, a borrower must then prove to the mortgage lender that the information contained in the application is factual. If you’re dealing with your bank some of this verification comes easy; after all, they can just check your account to see whether you have as much money as you say. Other verifications are a little harder and might require some hustling on your part to get these things done.

A borrower will need several kinds of statements to prove their income, the source of their down payment and other paperwork such as information on the house being purchased, any child support or alimony payments (either paid out or received) and a copy of the purchase contract. Income is proven by paystubs and a letter from the employer for salaried borrowers, and by 2 years of  Notice of Assessment's for self employed borrowers.

With all the mortgage fraud that exists in the market, lenders remain extra cautious when it comes to confirming a borrower’s information. By the end of the process, most borrowers will be frustrated by the mountains of paperwork.

The Down Payment

To get a mortgage in Canada, a borrower has to have at least 5% of the property’s value for a down payment. The lender supplies the rest of the money to pay for the house and the borrower slowly pays back the lender. To avoid CMHC insurance premiums, a borrower must put 20% of the house’s value up as a down payment.

For the most part, any money you have sitting in any account can be used as a down payment. Money in a chequing or savings account obviously can. It’s the same thing with money or even securities sitting in a brokerage account, except the securities will have to be sold. Even a borrower’s RRSP can be used, providing the borrower pays that money back in 15 years. If the borrower doesn’t, that money will be taxed. You can even use your TFSA or equity in an existing property as a down payment.

The borrower has two options if they don’t have the cash available to cover the down payment. They can either borrow the money or get the money as a gift from a relative. A borrower can either borrower the money in the form of a unsecured line of credit, or use a cash back mortgage to repay a down payment loan. A cash back mortgage can’t be used directly for the down payment. Or, if a borrower has a relative that is willing to help them, they can get a gift from that relative, providing both parties sign a simple agreement that there is no expectation of repayment.

Canadian lenders are extremely flexible when it comes to down payments. If you can’t come up with the required down payment, then maybe homeownership should be rethought.

Income Qualifying

The two ratios that determine your maximum mortgage are gross debt service ratio (GDS) and total debt service ratio (TDS). The formula's are as follows:

GDS: Payment + Property Tax + Heat + ½ Condo Fees = less than 32% of gross income

TDS: Payment + Property Tax + Heat + ½ Condo Fees + All Other Debts = less than 40% of gross income

The formula's are much less complicated than they appear to be. If you made $72,000 per year (that’s $6,000) per month then all you’d need to do is multiply 6000 by .32 and .40 to get the maximums, in this case being $1920 and $2400.

What that means is $1920 per month maximum can go toward the mortgage payment, property tax, gas bills and half the condo fees (if applicable). This also gives the borrower a maximum of $480 per month of debt payments the lender will tolerate.

Depending on how high a borrower’s credit score is, GDS and TDS ratios can go higher. Any borrower with a credit score above 680 can have a GDS of 39% and TDS up to 44% of their gross income.

Let’s look at a real world example.

Couple A makes a combined $80,000 per year. What’s the maximum mortgage they’d qualify for? They have excellent credit (both above 700) and have a car payment of $400 per month. They’re looking for a 5 year fixed rate of 4.5%.

Income: $6666 per month
Debt: $400
Property Taxes (estimate) $400
Heat: $85
Condo Fees: N/A

So we multiply $6666 by .44 to get $2933.33. This is the maximum the couple can pay for their commitments.

$2933.33-$400-$400-$85 = $2048.33

$2048.33 is the maximum mortgage payment this couple can have. Plugging that back into a mortgage calculator, it means the couple can max themselves out at $370,087, assuming they take out a 25 year amortization.

Of course, just because a borrower can qualify for a specific number, doesn’t mean they should max themselves out. I would recommend to everyone not surpassing the 32%/40% ratios, no matter what their credit score is. Ideally, I’d want a borrower to not spend 32% of their income on housing plus debt. However, I realize in many Canadian cities this isn’t very realistic.

CMHC Default Insurance

CMHC has all sorts of different homeowner products (more info on them can be found at CMHC’s website) that have different insurance policies depending on the size of the down payment and the length of the amortization. If you have a bigger down payment then the premium amount goes down.

CMHC insurance is mandatory for any mortgage with less than 20% down. Sometimes it required by the lender on properties with more than 20% down, especially rental properties. Once a borrower applies for a mortgage and the lender approves it, the lender then sends that mortgage into CMHC for their approval. CMHC receives the electronic submission and looks at two things- the borrower and the property.

Since so many homes have CMHC insurance, the system has a large database of similar homes in the very same neighbourhood that it can use as comparables. Using the database, the system comes up with a value for the home, a number they will insure up to. Once the borrower’s credit is also verified CMHC will approve the property.

The premium is added to the principle owing the borrower doesn’t have to come up with the case for an insurance policy totalling thousands of dollars. Don’t confuse mortgage default insurance with mortgage life insurance. The only person mortgage default insurance protects is the lender. The borrower won’t see two dimes if the bank is forced to take back the house.

Fixed Or Variable Rate

Typically a borrower will save money if they go with a variable rate. According to mortgage guru Moshe Milevsky in a study published in 2001, variable rate mortgages came out ahead of their fixed rate counterparts 88% of the time since 1950. Those savings can really add up on a mortgage in the hundreds of thousands and over 25 years.

Advocates of fixed rate mortgages often cite the stability of the payment as the biggest advantage of having a fixed rate and they are absolutely correct. The borrowers who take on the standard 5 year fixed loan take comfort that their payment will be the same every month, no matter what interest rates do. For them, taking out the fixed rate hedges their interest rate risk.

Ultimately, a borrower needs to decide how much this payment certainty is worth to them before deciding on a fixed or variable rate mortgage.

There are other options for borrowers who can’t decide between a fixed or variable mortgage. They could take a short term fixed term (say 1 or 2 years) which will have an interest rate lower than a 5 year fixed. Lenders are also starting to offer hybrid products that combine a fixed and variable mortgage, giving borrowers a lower interest rate and increased rate protection if interest rates go up.

Mortgage Affordability: How Much Can I Afford?

Read the following mortgage affordability tips before you set out to find the home of your dreams:

Consider your annual household income. This is a key factor when determining how much of a mortgage you can afford. In addition to calculating your annual household income, consider any income changes that may impact your ability to make your payments. For example, if there are currently two major income sources within your household, would you still be able to afford your mortgage if one was removed? What if a child comes into the picture and your partner decides to become a stay-at-home parent? Consider all factors before deciding.

Consider your down payment. Currently, you are required to have at least a 5% down payment when buying a house. The size of your down payment is one factor in determining the size of mortgage you can afford.

Consider your debt. When determining “How much can I afford?” one of the other important factors to take into account is the amount of debt you currently have. The lower your debt-to-income ratio, the more money you’ll likely have to put towards your mortgage. In addition, your debt level will also help to determine how large of a mortgage you will qualify for.

Consider your amortization period. If you are simply trying to keep your regular mortgage payments low in order to comfortably fit the payment into your budget, you will probably want to apply for a mortgage with a longer amortization period. However, if you don’t mind a somewhat larger regular mortgage payment in order to save money on interest in the long run, you may want to consider a shorter amortization period.

Consider your closing costs. Closing costs are an often overlooked expense that will definitely help determine how much money you can afford as a down payment.

Consider your property taxes, various types of homeowner’s insurance such as damage, title etc and additional expenses. Lastly, there are a few additional expenses that may impact how much money you have to put towards your mortgage each month. Expenses like property taxes, homeowner’s insurance and even things like home maintenance should be factored in before making your final decision. These costs are often overlooked but should be considered before settling on the home of your dreams.

How to improve your credit rating

Increasing your credit score when considering the purchase of a home and obtaining a mortgage is important to have a high credit score.  But more importantly you should have good overall credit.

Starting with the basics, what is a credit score and credit report? When applying for credit, companies consult one of two central reporting agencies – Equifax or TransUnion. Equifax, the larger of the two, is most commonly used.  Whenever a lending company extends credit they report to either Equifax or TransUnion or both, on your credit limit, credit used, and status of repayment.  A person’s total score and report are based on all the creditors’ information combined together.

There are a couple options for checking your own credit score.  You can have a certified Canadian Home Buyers  Mortgage Broker get your report for you OR you can do it yourself. If you choose to do it yourself you can purchase your credit report directly from Equifax (www.equifax.ca).

Equifax does offer free reports, however, they do not include credit scores on the free reports.  This lack of information severely limits their usefulness.  The advantage of checking your score yourself is that your report and score are unblemished.
When another institution or company checks your score it will affect your score negatively to a small degree. Whether you order your own report or you have a broker do it for you …know your score.

To qualify for the best mortgage rates and products you will want to ensure that you have at least 2 accounts that have been active for at least 2 years.  Ideally your credit score would be north of 680. It is possible to work with less, but your options may be more limited.
If your score and report need some work, what can be done?

1.     Pay bills on time.  While this may seem like a bit of a no-brainer, it is the basic foundation of a good score and a good report. Nothing will hurt your score more than consistently missing payments.

2.     Low balances. Credit cards and other revolving credit facilities are very important methods of establishing your credit.  Know this though: high balances will hurt your score. They also tell lenders that you might be a client who overuses credit, whether that is the case or not. Keeping your balance to less than 50%, will help you improve your score, while going above 75% can hurt it.

3.     Pay Quickly. Pay off your high balances as fast as you can – preferably monthly. At the very minimum, make sure you are keeping up with your minimum payments.

4.     “Flash” your Cards. All credit card companies will automatically pay your monthly charges if you phone to request this. It’s a great way to eliminate interest charges, and it builds your credit rating fairly quickly.

5.     What you need. Do not seek more credit just for the sake of it. Opening new accounts lowers the average age of your existing accounts, which can bring down your score. Don’t be a credit glutton.

6.     Old accounts are good. That old account you don’t use anymore that you were considering closing? DON’T! Unless there is something terribly wrong with that account, closing an older account will again reduce the average age of your accounts. Use the account now and then to keep it current, but again, make sure to pay your bills on time.

7.     Eliminate Errors. Nobody is perfect. Not even the companies who are responsible for reporting your credit usage. If you find an error in your report you can have it removed by contacting Equifax. Removing these errors can be the difference between “Approved” and “Declined”.

8.     Limit applications for credit. When you are trying to open a new account, do not apply for a card or loan unless you have already decided on the provider. Too many credit applications in a short period of time will lower your score, and could hurt your eligibility. When it comes time to make your home purchase, a mortgage broker can help you with this very point. As brokers generally have similar interest rates available, you should determine who you are going to use before ever making an application. Select a broker you trust who has proven their ability to manage your mortgage and help you reduce the overall cost of homeownership.

9.     Meet with a credit counsellor. As a last resort, if you have major credit issues you are unable to solve on your own, consider meeting with a credit counsellor. In this regard, be very careful. There are a lot of “wolves in sheep’s clothing” out there in the credit industry. Select a company that is non-profit and can show you how they will help you improve your credit and get out of debt. Do not listen to companies who tell you they will help you pay less than what you owe – it will end up costing you more in the long run.

10.  Time. Sometimes it just takes time. All of these things need to be done for a while before they will have much effect on a person’s score. In this, patience can be a real virtue.
A final note to address the severely credit challenged: If you are recovering from a bankruptcy or consumer proposal you will likely need more extensive credit counselling. There are mortgage products available to the credit challenged, but you will find they are more costly than and not as attractive as what is available if you can improve your credit.

The basics of credit are really quite simple – get what you need, use it wisely, pay your debts quickly. Your discipline and hard work will pay off.