For potential home buyers and home owners who have had difficulty with credit in the past, take heart! All is not lost. Help may be just around the corner. 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 in offering credit to tough credit clients due to risk portfolio guarantees they offer their investors. Most investors would shy away from investing/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.
The structure of the financing is either; one mortgage up to 80% of the value of the home or a combination of a first and second mortgage, if the loan amount exceeds the 75% threshold. The first mortgage is through an institution and the second is usually through 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.
For “Tough Credit” clients mortgage qualification requirements are as follows:
Minimum Down Payment/Equity NeededIn a tough credit situation, the down payment is everything. If the mortgage loan goes in to collection, the down payment/equity provides a cushion for the lenders while they go through the legal proceeding to gain the right to reposes 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.
Income RequirementsThe 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. The income requirements do not have to fit into the typical GDS/TDS ratio calculations. Self – employed clients quite often have to acquire their financing under this program as many do not show enough taxable income to qualify under mainstream guidelines.
Property RequirementsThe 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 their security that their investment is protected in case of default. The lender must be extremely comfortable that they can recoup their investment. Their comfort comes from evaluating an appraisal of the property that must be done by an accredited appraiser. If the property does not meet with their approval, 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 reposed home is invariably easier.
Credit RequirementsThe 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%.
Previously BankruptIf 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. We can help you with obtaining a secured credit card, if you wish.
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/Broker FeesTypically, for “A” mortgage clients, the banks will compensate the broker 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 the broker. 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.
As licensed Real Mortgage Associates and members of the RMA group we are focused on providing you with top quality mortgage advice.