Bah Humbug: Refinancing, Debt & Bankruptcy

I cannot remember a worse week in my mortgage business. For all the bad news I will reference below, I hope you can find a valuable lesson. These clients have forced themselves into difficult financial situations—overwhelming and multiple debts, including tax arrears, collections, and more.   When we are employed, paid well, and live accordingly, there should be no serious financial problems.  However, what if a job ends unexpectedly, or some other unforeseen issue occurs?  In all cases, the key is to continue to “live accordingly,” which may include adjusting your lifestyle.

Generally, when in trouble, people look to the equity in their current home for a financial solution.  It sounds easy: consolidate debt, lower payments, and suddenly, you can afford to pay off your debts, and maybe even live a little. 

The gap in the above scenario is our weak economy; by association, the drop in real estate values.   A refinance is only possible when there is enough value in the property to pay off a large sum of your debts plus other incurring fees.  This week, I have had four clients declined a mortgage because their debts have so severely outweighed the property value; therefore, the only advice I can give is to either try and sell, ask for help from family members, or go bankrupt.  The latter is an especially dark and dismal option that I hate to offer up, but unfortunately, may be the only way to escape from a world consumed by debt.

Mortgage Quiz

I thought I would try and think of a number of questions I often get asked. Hope this helps but if your question wasn’t asked and answered, call or drop by.

a) Can I build a new home on my own? Yes, but not all lenders allow.

b) Can I get financing to buy just land? Generally no, but ask your branch and maybe they will.

c) Do I charge? No, except for “private mortgages”.

d) Once you have had credit problems, does this ever improve? Yes, in fact credit activity is removed after six (6) years with Equifax and seven (7) years with Trans Union Credit.

e) Can I get a mortgage if I went bankrupt? Yes, the minimum you must achieve is two (2) years since you were discharged and one (1) year of re-established credit. Lenders like more than the minimum. Bring in discharge paper and we will review.

f) What is the difference between a co-signer and guarantor? A co-signer is placed on title of the property and is more significant. A guarantor is not on title and plays the role that if the applicant has problems, the guarantor will support the person.

...more questions to come in the future.

Credit Saga

I believe I could blog almost every week about credit horror stories because they happen so frequently.  This week is no different.  I was recently asked by a bank employee to investigate if she could secure a mortgage.  She had been bankrupt a year ago and had a recent marital split.  Her bank employer would not approve her, even though she had worked for this bank for over 20 years. 

As a broker, I have lenders that will consider a situation like this. So, I took her application and drew a credit bureau.  Sure enough, she was three months from the end of the period where the bankruptcy shows on a credit bureau.  After a bankruptcy, a person must have perfect credit behaviour—that means no late payments, excessive use of credit or too many inquiries.  In her case none of this occurred, yet her rating was low.  After looking into it, we found out her ex-spouse had ordered a credit card and she was on his application.  She never knew about the card and he failed to make payments.   It was considered written off on her bureau too, which is why her score was so low. 

I thought initially I could easily help—now, it is going to involve hard work to get her over this hurdle and get her approved.

Bankruptcy: Rules of the Game

Like all issues related to good or bad credit, credit activity remains on your credit bureau for 6 years with Equifax, and 7 years with Trans Union Credit Bureau.  

I am frequently asked the question, “Can I get a mortgage having gone bankrupt?”  The answer is yes, providing the following criteria are met.

Insurers like Canada Housing and Mortgage Corporation (CMHC) and G.E. require that you can qualify for a mortgage after completing a minimum of 2 years time following your discharge date.  Check your Certificate of Discharge papers for your date.  Also, you must have re-established credit.  This is not a car loan that you had before/during your bankruptcy.  “Re-established” means new credit.

Below are a couple of recommendations:

1. The longer you wait after the 2 year period, the better your chances of qualifying.

2. Having re-established credit with a Capital One secured credit card (or Home Trust Visa, etc.) with a $500.00 limit won’t cut it.  If you are able to get a secured credit card, try every 6 months to increase the limit, up to to $1000.00 or even $2000.00.  Just don’t use it too much and be sure to never have a late payment.

2. If you ever have a late payment while your bankruptcy information remains on the credit bureau, you are out of luck.

Next time I will discuss a few bankruptcy “horror stories” so you can avoid them in the future.  For more information on bankruptcy in Ontario, please click here.