#10 Decline - Low Credit Score

I estimate that 80% of all Canadians have no idea what their credit score is. Some say ignorance is bliss. For the most part, that is probably true. But bliss often comes to a halt when you apply for a loan a mortgage and are declined by your bank. The loan officer can usually only tell you that the decline is due to "insufficient credit" or something similar. You might ask for details, but since teh loan officer doesn't actually see your credit report, they can't help you. It's a frustrating experience. Since banks have created such a high level of trust, you might just accept your fate and go home without an approval.

If you had applied with a mortgage broker instead, the broker could get a copy of your credit report and review it with you in detail. Often there are errors or old information still reporting on the bureau.

Here in Canada, Credit Scores range from 300 to 900. The higher the score, the better. Most Canadians have a score in the 625 to 700 range. Generally speaking, any score over 680 is considered "excellent". The score itself is calculated using proprietory credit scoring calculations. These calculations are based on different sections of the credit bureau.

These sections include your address history. The more frequently you move, the less stable you are, and that has a negative effect on your score. The next section is you credit inquiries. Each time you do a credit application a credit inquiry appears on your credit report. Each inquiry can drop your score by 5-10 points. The more you "shop around" the worse you credit score gets. One of teh benefits of dealing with a mortgage broker is that the broker can request one bureau and then send that one credit bureau to each lender electronically, so that each lender does not request an additional credit bureau.

The last section of the credit bureau report is your Trade Lines. Trade Lines are your credit cards and loans. The score is calculated based on how long the trade line has been open and how well it has been repaid. However, about 30% of the score is based on your Credit Utilization. That simply means, how much is the difference between your credit balance and your credit limit. The closer you are to your credit limit, the worse you score. Since Credit Bureaus and Credit Scores are a snapshot in time about 1-2 months ago, often it is just a matter of waiting for the credit bureau to report new credit balances. Or, if you have not paid down your debts, you could try make a large payment(s) and then wait for the credit bureau to get updated in 1-2 months.

If there are errors or incorrect information on your credit bureau you will never know unless you sit down with an experienced mortgage broker or get a copy of your credit report for yourself.

If you have been declined by your bank, please give us a call and we can review your credit repoert with you and give you the advice you need to get your credit report into a position where you will qualify for a mortgage.

Why do Banks Turndown Mortgage Applications?

There are probably 100 different reasons banks don't approve mortgage applications.

The Top 10 reasons include:
1. Low Credit Score
2. Not Enough Established Credit
3. Errors on the Credit Bureau (that you don't know about)
4. Short Time on the Job - Still within Probationary Period
5. Self-Employed and Unable to Prove Sufficient Income
6. Debt Ratios are Too High
7. No Down Payment
8. Property Value is Too High
9. They Don't Like You
10. Errors on your Credit Application

I will discuss each of these reasons in my next blogs.

Dangerous Home Equity Lines of Credit

Over the past few years we have heard about how most major banks were frequently offering their clients a combination of a Mortgage and a Home Equity Line of Credit. This trend seemed to only be happening in the big cities like Vancouver, Calgary, and Toronto where property values are larger and seemed to appreciate much quicker than properties in Atlantic Canada Many Canadians began relying on this extra available credit and before too long, found themselves with a Home Equity Line of Credit at its credit limit. As the Line of Credit's balance increases, so do the payments, and many Canadians found themselves making the minimal, interest only, payments. Therefore, the Principal Balance never decreases! When property values in those major cities decreased over the last couple of years, many Canadians found themselves owing 100%, or more, of the value of their property. As a result, some Canadians were unable to sell their homes because they did not even have enough equity left to pay any Realtor's real estate fees.

The other negative impact of having a maxxed out Line of Credit is that it will cause credit bureau credit scores to drop substantially. This makes it even more difficult for the homeowner to refinance and/or consolidate thier Line(s) of Credit into a new mortgage. Lines of Credit do appear on the credit bureau, whereas mortgages do not.

We have started to see a significant increase in this predicament here in Atlantic Canada with many clients finding themslves as risk of loosing their home, or at the very least living from paycheck to paycheck just to keep up with the payments. This makes it nearly impossible to reduce the Line of Credit's balance and improve/increase the credit scores sufficiently to qualify for a new mortgage.

If you are offered a Home Equity Line of Credit, I would recommend you politely say "No Thanks!" If you find yourself with a Home Equity Line of Credit that has a balance that is creeping up to the credit limit, please give us a call as soon as possible, before your credit scores drop too far. We have some really great interest rates that can help keep your new mortgage payment low, while enabling you to pay down the principal balance.

More Bad news for Self-Employed Clients

The Canadian Mortgage and Housing Corporation (CHMC) has just announced that they are basically eliminating their "stated income" programs for self-employed clients in April. Today, self-employed clients can qualify for a mortgage by "stating" their income and not have to prove their income with Income Tax Statements, Notice of Assessments, etc. Self-Employed people can typically write of much of their gross income, thereby reducing their taxable income. This is great for income tax purposes, but makes proving income very difficult.

In April, Self-Employed clients' Debt Ratios will be calculated using provable income. They will need to prove their income via Line 150 on their T1 General income tax forms and Revenue Canada Notice of Assessments. They will also have to prove they have been self-employed for at least three years.

As more and more Canadians become self-employed, Revenue Canada's tax base is being erroded. Since CMHC is also a department of the Federal Government, I believe this is Revenue Canada's way of getting self-employed Canadians to report higher income taxes and thereby pay larger income taxes.

Is it time to Lock-In your Variable Rate Mortgage?

I get this question fairly often. Fixed Interest Rates are expected to start going back up starting today, but there's no need to panic. Variable Rates are not changing and are not expected to change for another 4-10 months.

What should you do? You should make sure you are taking full advantage of your Variable Rate mortgage "prepayment privledges" by contacting your mortgage company and asking them to simply increase your payment by 10% to 20%.

Why should you increase your payment? Since your Variable Rate is currently in the 1.35% to 2.25% range, most of your payment is paying down your Principal and very little is paying interest charges. By increasing your payment, you will pay substantially more toward your Principal and your mortgage balance will drop quickly.

If you locked in your mortgage rate by converting to a fixed rate mortgage, your payment would increase, but you would be paying substantially more towards interest and your mortgage balance would be reduced very slowly.

By increasing your payment on your Variable Rate mortgage, you will be mortgage free quicker and therefore own your home that much sooner.