How I can help you deal with bad credit
If you’re a potential homebuyer or homeowner in Chatham and the surrounding area, with bad credit, you still have options.
Due to the competitive nature of the Canadian mortgage industry, more and more lenders are seeking out niches to obtain mortgage clients. One such niche is the tough credit mortgage client.
These lenders are not the mainstream institutions that you find on street corners in Canada. They are “mortgage banks” specializing in the art of lending mortgages. Several of these institutions focus on the tough credit market.
Major Canadian banks are restricted when offering credit to clients with bad credit due to risks they pose to investors. Most investors would shy away from investing or buying stock in a “Schedule ‘A’” financial institution if they believed that the institution was providing loans to clients who have had difficulty paying back previous loans, regardless of the circumstance. As a result, clients are advised to seek mortgage and credit elsewhere.
There are two ways to structure the financing:
1. One mortgage up to 80% of the value of the home, usually through an traditional institution
2. A combination of a first and second mortgage, if the loan amount exceeds the 75% threshold, often through a private lending sources.
In some cases however, where the credit is considered “bruised” but acceptable, a lender may consider providing one mortgage up to 85-90% of the home’s value.
Minimum Down Payment/Equity Needed
In a tough credit situation, the down payment is everything. If the mortgage loan goes into collection, the down payment/equity provides a cushion for the lenders while they go through the legal proceeding to gain the right to repossess the home. Therefore, the lenders will look for a minimum of 15% of the value of the home in down payment/equity. (e.g. $200,000 X 15% = $ 30,000). Occasionally, exceptions are made whereby 10% down payment will be sufficient. That will depend on how the other aspects of the applicant’s qualifications stack up such as income and the extent of the damage to the credit.
The income requirements must be reasonable to service the loan. Reasonable in that the applicant must be working or self-employed and have income coming in. The income requirements tend to be flexible as the down payment/equity increases, and they don’t have to fit into the typical GDS/TDS ratio calculations. Self-employed clients often have to acquire their financing under this program as many do not show enough taxable income to qualify under mainstream guidelines.
The property is the most important component of a tough credit mortgage loan. In essence, the lenders are lending on the value of the home and as such will be insistent that the property is a good and marketable piece of real estate. This is considered their security that their investment is protected in case of default.
The lender must be extremely comfortable that they can recoup their investment. In order to properly evaluate the property, they require it be appraised by an accredited appraiser. If the property does not meet with their standards, a loan will not be offered. As you probably have already guessed, a property in a major urban center is easier to finance versus a farm in rural Canada. There simply are more buyers for urban properties and the chance of liquidating a repossessed home is invariably easier.
The minimum requirement is that you have a credit rating. Different lenders have different lending thresholds. Some will insist that any outstanding bad debts be paid off before they will lend the money. Others will not care as long as the down payment/equity is increased to 20% instead of the usual 15%.
If you have declared bankruptcy, you may still qualify for mortgaging. Your available down payment determines what and how much you will be approved for. CMHC requires that a previously bankrupt client be discharged a minimum of two years before an insured mortgage is offered with 5 or 10% down payment. Additionally, CMHC requires that you have re-established credit after the bankruptcy.
This is not as difficult a process, as it may seem. There are several lenders who will offer a secured credit card to previously bankrupt clients. If your two year, post-bankruptcy waiting period is not yet past, you will be required to have a minimum of 15% of the purchase price, or you will be unable to get mortgage financing. The structure of the financing will be in the form of a first and second mortgage to 85% of the value of the home.
Lender/Mortgage Agent Fees
Typically, for “A” mortgage clients, the banks will compensate the mortgage agent for the mortgage. However, in tough credit situations, the compensation for the broker for the work done in securing financing, must be paid by the client. This fee is negotiated between you and your mortgage agent.
Almost always, there will be fees charged by a second mortgage lender. The fee amounts are determined by the lender, based on their risk evaluation. A lender may consider reducing their fee if you agree to take a higher rate, in effect, amortizing the fee over the life of the mortgage term. This is handy if cash is tight at time of closing.