Unimor Capital Corporation

Tag: credit history

  • How to Get a Mortgage with Poor Credit

    How to Get a Mortgage with Poor Credit

    Faced with high inflation and rising interest rates, more Canadians are finding it difficult to qualify for a mortgage. The problem can seem even worse if you struggle with poor credit. The good news is that even if your credit history is less than stellar, you may not have to put off buying a home, although you will likely pay more for your mortgage.

    Do You Know Your Credit Score?
    One of the biggest mistakes people make before getting a mortgage is not knowing their credit score before applying. Recent reports have revealed that more than 50% of Canadians have never checked their credit scores. If you’re only finding out that you have bad credit when you apply for a mortgage, it may be too late to do something about it.

    What is a Good Credit Score?
    While lenders can set their own minimum credit score guidelines, the following generally applies:

    • 800 or above: Excellent
    • 720 to 799: Very Good
    • 650 to 719: Good
    • 600 to 649: Fair or average
    • Under 600: Poor

    To obtain a mortgage with a Prime lender (banks and credit unions), you will likely require a credit score of 600 or higher. In fact, any mortgage with less than 20% down must also be approved by Canada’s mortgage default insurance providers, i.e., CMHC, who require at least one borrower to have a minimum credit score of 600 or higher. If your score is below 600, you will most likely need to deal with an alternative or private lender, come up with a 20% down payment, and be subject to a higher mortgage interest rate.

    How to Get a Mortgage with Poor Credit
    If you struggle with a bad credit score, there are still ways to qualify for a mortgage loan:

    Increase Your Down Payment Amount
    If you have bad credit, you can improve your chances of being approved for a mortgage by coming up with a larger down payment. While it’s possible to obtain a mortgage in Canada with as little as 5% down, if your credit score falls below 600, you won’t qualify for mortgage default insurance, and a 20% down payment will be required. A larger down payment has other benefits as well. By avoiding the hefty CMHC premiums, you will save thousands of dollars during the life of your mortgage.

    How to Find More Money for Down Payment

    • Gift from a family member. You can receive a part, or all, of your down payment as a gift from a family member. The lender will require them to sign a gift letter to confirm that the funds aren’t borrowed and that there is no expectation of repayment.
    • Withdraw RRSP funds under the Home Buyers Plan (HBP). If you are purchasing your first home, the government of Canada has a program that allows you to withdraw funds from your RRSP to use towards your down payment. The current withdrawal limit is $35,000. You will have to repay the amount you withdraw into your RRSP, but you have 15 years to do so, beginning in the second year after the year in which you removed the funds.
    • Delay your mortgage application. If you have tapped out all potential down payment sources and are still short, you may have to delay your mortgage application while you save more money. Can you hold off for six months or a year? Consider a side hustle to increase your income and your savings rate.

    Improve Your Debt Servicing Ratios
    In addition to having an adequate down payment and credit score, mortgage lenders must determine if you can afford to make the monthly mortgage payments. To do this, they use two calculations, Gross Debt Servicing (GDS) and Total Debt Servicing (TDS).

    Your total debt servicing (TDS) measures your total monthly obligations as a percentage of your gross monthly income. This includes your mortgage payment (PIT) and any other loans or credit card payments you might have. Your TDS ratio should not be more than 40%, although lenders may accept TDS as high as 44%.

    You can increase your approval chances by lowering your TDS. There are a few ways you can do this:

    Increase Your Income
    I alluded to this earlier but consider ways to increase your income. The easiest is to make more money at the job you already have, by asking for a raise, or getting promoted. If that’s not an option, think about a second job, keeping in mind that a mortgage lender will require you to be off probation before they can use your income for debt servicing purposes. Side hustle income is also great, but it likely can’t be used to qualify for a mortgage.

    Pay Down Existing Debt
    To improve your mortgage affordability, think about ways to free up cash flow by reducing your debt load. Among the worst culprits are huge vehicle loan payments, which have surged to record levels in recent years.

    Avoid Taking on Additional Credit
    You’ve heard the saying, “An ounce of prevention is worth a pound of cure.” It’s easier to say NO to more debt than dealing with the debt you already have (like that massive pickup truck loan.) If you’re in the market for a mortgage, it may be best to avoid taking on other debt. If you do, ensure it will not impact your chances of being approved for the mortgage.

    Go Through a Private Mortgage Lender
    If your credit is so bad that no A or B lender is willing to approve your mortgage application, talk to your mortgage broker about going through a private lender. Private lenders aren’t just ‘bad credit mortgage lenders.’ While they do a lot of bad credit mortgages, they also lend to borrowers who may have decent credit but whose application falls ‘outside the box’ of a bank or credit union.

    Your broker will bring up the private lender alternative before you do. Understand that private lenders charge much higher interest rates than A lenders, but the idea is to deal with them for a year or two and then move the mortgage to a prime lender.

    Obtain a Co-Signer
    If your credit score prevents you from getting a mortgage, another option is to obtain a co-signer. A co-signer must have very strong credit, a solid net worth, and enough income to support the mortgage on their own should the primary applicant fail to make the payments.

    The downside to obtaining a co-signer is that it ties you to that person financially, potentially for several years, in the case of a mortgage. It can also be challenging for the co-signer themselves, as they must include your mortgage PIT whenever they apply for credit, even though they are not making the mortgage payments. For these reasons and more, I don’t recommend using a co-signer, except in rare instances. But it is an option.

    Improve Your Credit Score
    Ultimately, if your credit score is standing in the way of getting approved for a mortgage from any lender, your only other option is to address your low credit score. And while it won’t happen overnight, there are several steps you can take to improve your score.

    How to Improve Your Credit Score
    If you are struggling due to poor credit, there is hope. Here are seven steps you can take to improve your credit score.

    1. Pay off any unpaid collection items. If you have unpaid collections showing up on your credit report, you need to settle them as quickly as possible. These are debts in such high arrears that the lender has sent them to a collection agency to pursue repayment. Generally speaking, no bank or credit union will lend money to someone with unpaid collections showing on their bureau. If you have multiple collection items, I recommend that you start by paying the lowest balance owed first.
    2. Pay your bills on time. If you have bad credit, continuing to make late payments will only worsen matters. Take steps to ensure timely payments going forward. Remember that most companies report late payments as soon as they are 30 days in arrears.
    3. Avoid making excessive credit inquiries. Each time you apply for credit, it counts as an inquiry on your credit report, and your credit score could drop as much as five or ten points, albeit temporarily. If your account shows multiple inquiries over a short period, say six to twelve months, potential lenders may view it as evidence of credit-seeking behaviour, and cause for concern.
    4. Keep Your Credit Utilization to a Minimum. Credit bureaus, like Equifax and Transunion, keep track of your credit utilization: the percentage of available credit you’re using. For example, if you have a credit card with a $10,000 limit and you carry a balance of $5,000, your utilization is 50%. When your credit utilization exceeds 30%, it’s a sign that you might struggle to manage your credit. Credit utilization is a determining factor for your credit score, so try to pay off balances in full, or at the very least, keep them under 30%.
    5. Don’t close longstanding credit accounts. One of the things that strengthen your credit score is the length of time a credit product has been reported to the bureau. When you close a longstanding credit card or line of credit, it may shorten your history and lower your score. And while it’s often beneficial to reduce the number of credit cards you hold, think twice before closing a longstanding account. If you feel like it’s the best choice, wait until after your mortgage application has been approved and finalized.
    6. Check your credit score regularly. What gets measured gets managed, but it could also be stated that what gets measured gets improved. If you check your credit report regularly, you can take corrective action if you notice any downward trends. You can also proactively correct errors and check your account for fraud.

    How Do I Find a Lender Who Will Approve My Mortgage?
    If you’re looking for a mortgage and are concerned about your credit score, your best bet is to consult a mortgage broker. Mortgage brokers have access to dozens of lenders, not just the big banks. They can shop your application to alternative and private mortgage lenders, in addition to the banks and credit unions, giving you the best chance for approval.

     

  • Is Your Credit Score Good Enough to Buy a Home?

    Is Your Credit Score Good Enough to Buy a Home?

    Three little digits can make a big difference when you’re trying to get a mortgage you can afford.  Whether you can land a mortgage with a low interest rate or even get any home loan at all often comes down to three little digits: your credit score.  Does your credit score need some help? And could it keep you from buying a home? Let’s find out.

    How do credit scores work?

    Canada has two main credit bureaus — Equifax and TransUnion — that collect and share data about how you’ve used credit in the country.  These private companies draw up credit reports that summarize your activity and use it to assign you a credit score.  Lenders like banks rely on your credit score to tell if you’re a good investment.

    Credit bureaus assess a lot of information in their reports, such as:

    • How long you’ve had a credit card
    • Whether you miss payments
    • Whether you stay close to your credit limit
    • The number of times you apply for credit
    • The size of any outstanding debts

    Credit scores range from 300 to 900 and they play a big part in being approved for a mortgage.  A higher score means you’re managing your credit well and making payments on time.  A lender will be more likely to let you borrow their money.  A low score suggests you’re a risk, so you could be refused outright.

    When your credit score is decent but not spectacular, a lender will compensate for that risk by saddling you with a higher mortgage rate.  A higher interest rate means a higher monthly payment and steeper total interest charges over the life of the loan.

    How do I know if my score is too low?

    Plenty of third-party services and a few banks will give you a free look at your credit score online.  Other companies will ask you to sign up for a paid service that may have other benefits, like credit monitoring and support.  According to Equifax, most lenders smile when they see a score of 660 or higher.  Anything above 760 is excellent. Anyone with a score below 560 will struggle to get a decent interest rate and may not get a loan at all.

    Each lender has different standards, and those standards can change depending on what’s happening in the mortgage market.  Some private lenders won’t be as demanding as major banks but may offer far worse deals to compensate. These “subprime” lenders work almost exclusively with people who have low credit scores.

    If your credit score needs work, you’ll want to carefully consider whether the cost of a higher interest rate is worth it. You may decide it’s better to delay your home purchase to give yourself time to improve your score.

    How do I raise my score?

    The easiest way to bring up your credit score quickly and snag that mortgage is to obtain copies of your credit reports from the major credit bureaus and make sure everything on them is accurate.  Canadians are entitled to a free look at their credit report at least once per year from both Equifax and TransUnion.  If you find any mistakes, dispute the errors so they can be removed.

    Paying bills on time, even if it’s just the minimum payment, is one of the most important factors.  Contact your lender right away if you fear you might miss a payment, and don’t skip a payment even if it’s in dispute.

    Try not to use too much of your available credit.  The federal government suggests using a third or less of what you could be using, even if you always pay off the balance.  Paying down your credit cards to cut your credit utilization can give your credit score a nice boost.

    Another option is to enroll the help of a free credit monitoring service. You’ll get instant access to your score and be able to check your credit history regularly.  You have a few other options — like using different types of credit rather than just credit cards, keeping old accounts active and trying to limit the number of credit checks — but these basic steps will put you well on your way to home ownership.

  • Credit Reporting 101

    Credit Reporting 101

    Your credit file contains information on all of your credit accounts submitted to the credit bureaus, including balances, limits, payment history, etc…, as well as identification information such as your name, address, age, social insurance number, marital status, spouse’s name and age, number of dependents, occupation, and employment history.

    What is a credit score?

    In Canada, credit scores range from 300 up to 900 points, which is the best score you can have. According to TransUnion, 650 is the magic middle number – a score above 650 will likely qualify you for a standard loan while a score under 650 will likely bring difficulty in receiving new credit.

    Lenders who pull your credit bureau file may see a slightly different number than you see when you pull your own file. This is due to the fact that each creditor applies a specific set of risk rules, giving and taking points for different purposes or preferences. This proprietary method of scoring will make a difference in the final calculation. The score you pull for yourself is calculated using an algorithm created for consumers that approximates these different formulas, and should still be in the same numerical range as the lenders’ scores.

    How long is information kept on my credit file?

    Actual inquiries made by credit grantors minimum of 2 years, however it may only affect you credit for the last 12 months
    Credit history and banking information 6 years from the last activity date
    Bankruptcies 6 years from the date of discharge (1st bankruptcy)
    Judgments, foreclosures, garnishments 6 years from the date filed
    Collections 6 years from the date of last activity
    Secured loans 6 years from the date filed
    Credit counselling, consumer proposals, orderly payment of debt (OPD) 3 years from the date settled or completed

    How can a low credit rating affect my life?

    Credit scoring is used by lenders, insurers, landlords, employers, and utility companies to evaluate your credit behaviour and assess your creditworthiness.

    1. Applying for a loan. Your credit score will be a big factor into the decision of whether you are approved or denied your application for more credit. Your credit score will also affect the interest rate and credit limit offered to you by the new credit grantor – the lower your credit score, the higher the interest rate will be and the lower the credit limit offered – the reason for this is you are considered more of a credit risk.

    2. Applying for a job. A potential employer may ask your permission to check your credit file and based on what they read, they may decide not to hire you due to your poor credit history. Yes, having bad credit could cost you a job!

    3. Renting a vehicle. When you sign an application to rent a car, the rental company can check your credit history to determine what their risk may be when they loan you their property. So although you are not applying for credit, the application documents you sign provide your written permission to access your credit information.

    4. The same is true when applying for rental housing – the landlord may assess your tenant worthiness and their risk by factoring in your credit rating and score, and they could pass you over for someone with a better credit rating.

    What information is used to calculate my credit score, and what factors will lower my score?

    If you have tried looking on the consumer reporting agencies’ websites, you have seen they provide very little information as to how your credit score is calculated. They believe this information is proprietary and therefore their ‘secret’. They do, however, provide a list of the main factors which affect your credit score:

    1. Payment History
    Equifax says: “Pay all of your bills on time. Paying late, or having your account sent to a collection agency has a negative impact on your credit score.”
    TransUnion says: “A good record of on-time payments will help boost your credit score.”

    2. Delinquencies
    Equifax lists: “Serious delinquency; Serious delinquency, and public record or collection field; Time since delinquency is too recent or unknown; Level of delinquency on accounts is too high; Number of accounts with delinquency is too high.”
    TransUnion lists: “Severity and frequency of derogatory credit information such as bankruptcies, charge-offs, and collections.”

    3. Balance-to-Limit Ratio
    Equifax says: “Try not to run your balances up to your credit limit. Keeping your account balances below 75% of your available credit may also help your score.”
    TransUnion says: “Balances above 50% of your credit limits will harm your credit. Aim for balances under 30%.”

    Ok, so avoid maxing out your credit – because if you don’t really need more credit you’ll be able to get it, and if you do really need it then you are more of a risk.

    4. Recent Inquiries
    Equifax says: “Avoid applying for credit unless you have a genuine need for a new account. Too many inquiries in a short period of time can sometimes be interpreted as a sign that you are opening numerous credit accounts due to financial difficulties, or overextending yourself by taking on more debt than you can actually repay. A flurry of inquiries will prompt most lenders to ask you why.”
    TransUnion says: “Avoid excessive inquiries. When a lender or business checks your credit, it causes a hard inquiry to your credit file. Apply for new credit in moderation.”

    There are two types of Credit Bureau file inquires: “hard inquiries” such as an application for new credit, which will lower your score; and “soft inquiries” such as requesting your own credit report, and businesses checking your file for updates to your existing credit accounts for approving credit limit increases, for example – these will not appear on your file or lower your credit score. So be careful to only apply for credit you really need.

    5. Length/History of Accounts
    Equifax says: A “common negative score factor… [is the] length of time accounts has been established is too short”
    TransUnion says: An established credit history makes you a less risky borrower. Think twice before closing old accounts before a loan application.”

    Having a longer history on your credit accounts earns you more points, so avoid closing your accounts if you may need them in the future. A good credit history is built over time – sorry, but there is no quick fix for this one.

    6. Variety of Credit Accounts
    TransUnion says: “A healthy credit profile has a balanced mix of credit accounts and loans.”

    Having a mix of credit products (credit card, retail store card, line of credit, car loan, etc…) will procure more points on your file than having only one type of credit, such as only credit cards.

    7. Too Many Accounts
    Having a lot credit accounts, especially if many of them carry balances, is another warning sign of financial distress, so if the Credit Bureaus think you have too many, they will deduct points.

    Other “derogatory” factors which negatively affect your credit rating and the Credit Bureaus don’t like to mention to you are:

    1. Errors
    One of the major causes of point loss to your credit rating are bureau reporting errors. Errors can be delinquent accounts reporting on your file that do not belong to you, late payments that were not late, and credit that is created from identity fraud – therefore not your credit. The Credit Bureaus are paid by the creditors who pull credit bureau files and in turn who report to them. Credit reporting is done electronically, and Credit Bureaus accept the information they are sent without any investigation into the accuracy of the information. Therefore, is it critical that you pull your credit bureau file at least once a year. Only you will know when there is an error on your file, and it is up to you to have the credit bureaus fix it.

    Look for these common errors:

    • Wrong mailing addresses
    • Incorrect Social Insurance Number
    • Signs of identity theft
    • Errors in your credit accounts
    • Late payments
    • Unauthorized hard inquiries

    If there is an error on your file you must contact the Credit Bureau, then it is up to the Bureau to investigate your complaint and to verify the information contained in your file by contacting the reporting creditor. When contacted by the Credit Bureau, the reporting creditor will have to verify the item they have placed on your file. You are entitled to be part of that process. Check your credit again 30-60 days after disputing errors. If any of the disputed inaccuracies remain, contact the creditor to further your dispute and determine if the item can be taken off your credit profile.

    2. Moving/Time at Address
    As previously discussed, a large number of credit file requests within a short period due to moving will lower your credit score. But on top of that, the length of time at your current address will influence your score, so try not to move a lot as it will affect your credit rating. The longer you remain at one address, the more points you receive.

    3. Changing Employment Frequently
    The longer you stay at a job, the higher points your credit score receives. You are seen as having a secure job and therefore being a secure, less risky credit consumer.

    4. Having No Mortgage or Housing Information
    The Credit Bureaus assign certain points for those who have mortgages and those who rent, and deduct points for those whose housing situation is unknown to them. As soon as you pay off your mortgage, the reporting account is removed from your file and you are in the unknown category, which will actually remove points from your credit rating! Credit card and other credit account history will remain on your account even after being paid off and closed, but unfortunately a paid mortgage does not benefit your credit rating. Imagine, you own your own home and that does not benefit your credit rating – does that even make sense? Also, not all mortgages report to the Credit Bureaus.

    5. Having High Revolving Credit Balances
    When you have high balances that are rotating between different credit accounts, this is a warning sign that you could be in financial trouble and therefore you could be considered a credit risk.

    6. Having No Debt
    Believe it or not, having no debt is also bad for your credit score! Here we go again – if you don’t need to borrow money creditors will be trying to throw it at you. If you do need to borrow money and have no debt or debt history well, you will have a harder time of it. If you do not have a history of credit use on your file to provide something for creditors to evaluate, they will see that as a risk, and you will be deducted points on your score for not having credit accounts.

    Tips to Raise Your Credit Score

    1. Correct errors, and track your report for future errors. Order your credit file from each bureau at least once per year.

    2. Lower your balances. If your debt levels are above 50% of your available limit, create a payment plan to reduce your balances.

    3. The biggest “tip” to having a good credit rating and a high credit score is to continually use credit and to repay that credit on time all the time. Set up automatic payments to help with this.

    4. If you have no credit history, or need to rebuild your credit, open a secured credit card account. You pay a deposit, which sets the limit of your card, then use it like a regular credit card. The secured credit card provider reports your payment habits to the credit bureau(s), so you will be able to gain points with an account in good standing.

    5. Look over our list, read your credit report, and identify any areas that could be improved for a higher credit rating.
    Remember, “your credit rating is not a reflection of your personal worth – it is merely a credit reporting tool” – Margaret H. Johnson. The good news is your credit rating is like your self-esteem, sometimes in your life it will be high and sometimes it will be low – however, you can always rebuild it over time!

     

    ~ Adapted from Debt Canada

  • Understanding Your Credit Report

    Understanding Your Credit Report

    A credit report is a history of how consistently you pay your financial obligations. It is created when you first borrow money or apply for credit and is built over time. The companies that lend or collect money or issue credit cards (banks, finance companies, credit unions, retailers, etc.) send credit reporting agencies specific and factual information about their financial relationship with you. Details, such as when you opened up your account, timeliness of your payments and if you have gone over your credit limit, are shown in full.

    Although this information is confidential, you have the right to see your credit report and no one else can have access to the information in the report unless you allow it. Typically, when you apply for a loan, a credit card or even a mortgage you will need to allow this organization to check your credit history. It will include the following account types:

    • Revolving accounts (credit cards & credit lines)
    • Installment accounts (loans)
    • Other accounts (cell phones)
    • Collection accounts

    If you would like to obtain a copy of your credit report you can contact a credit-reporting agency such as Equifax or TransUnion Canada. When you receive your credit score it’s important to make sure that the information is correct. If the score is lower than you were expecting, review your history and see where you may be able to improve.

    Tips to remember to improve your credit:

    • Make sure you have a credit history: you may not have a score because you do not have a record of owing money and paying it back. One way to build a credit history is by using a credit card.
    • Always pay your bills on time.
    • Don’t go over 50% of the limit on your credit card.
    • Apply for credit in moderation.