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So You're Canadian - With Bad Credit - And You Need a Mortgage...

For whatever reason, your credit is sub-stellar and the bank is either denying your applications, or offering ludicrous repayment terms.

Don't worry - all is not lost. Here's what you need to know:

• • •

Let’s see if any of this sounds kind of familiar to some of you out there...

In your younger days when it came to managing credit & money, you were simply foolish & stupid. You went through a rather ugly & messy divorce that cratered you’re A-1 credit rating, started a small business that ended in total failure and financial ruin. Out of the blue lost your job or had to deal with a catastrophic illness or family emergency. Agreed to co-sign on a loan for a best friend, ex-girlfriend or family member who defaulted and left you holding the bag with the lender. Had to go through a consumer proposal for you debts or were driven to file for bankruptcy by your circumstances.

Bottom line is that you have a less than perfect credit history, ok let’s just say it’s awful and your want a mortgage and your banks say’s no!

Now what?

Just a few years back ago if you found yourself in this situation needing a mortgage, you trotted out to your local neighborhood bank on the corner to apply for a mortgage.  You would wait for days on end to find out if the loans officer would approve your application only to hear that you didn't fit the bank's criteria and got declined. They would say something like "it's unfortunate about your circumstances, but there's nothing we can do at this time" And no matter where you went you always heard the same thing, after a while there was little to do but give up on the idea of ever owning a home.

Luckily for you, these days there are far more lenders out there who offer options to folks just like you, they specialize in granting non-conventional mortgage loans. Not only are they willing to work with clients that have past credit issues like the ones already mentioned above but also with one’s whose credit may be perfect but the overall deal doesn't fit into the guidelines of the major banks and insurers like CMHC.

These non-conventional mortgage loans help people who...

• Need a sub-prime mortgage
• Have less than stellar or bad credit
• Sometimes have no established credit
• Have had a previous bankruptcy
• Are currently in a consumer proposal
• Or are in credit counseling today
• May have recently come to Canada and are landed or non-landed immigrants
• Are self employed and really can't verify their income by traditional means
• Are off shore investors, investing in Canadian real estate
• Are in need of an alternative mortgage lender for their project as it doesn’t meet traditional guidelines

So if you fall into the above category in order to get a non-conventional mortgage loan in Canada you will need to keep the following in mind:

1. Property

The property is the most important component of a tough credit mortgage loan. At the end of the day, the lenders are lending on the value of the home and therefore will be adamant that the property is a above average and marketable piece of real estate. This is their security that their investment is protected in case of default. The lender needs to be extremely comfortable that they can recoup their investment should a default occur. Their acquire this comfort by evaluating an appraisal of the property that's conducted by an accredited appraiser. If the property does not meet with their approval, a mortgage loan will not be given.

A property in a major urban center is far easier to finance versus a farm in a rural location that's because there are far more buyers for urban properties than rural ones and in the event of a foreclosure it can be sold in a reasonable time period thereby protecting the lenders investment. As far as loan to values non-conventional lenders as a rule don't generally exceed 80%, there are a few who will go in excess of this but not many.

2. Equity

In a tough credit situation, the down payment or equity is everything. If the mortgage loan goes into foreclosure, the down payment/equity is all that’s left to provide a cushion for the lender while they go through the legal proceeding. Therefore most "B" mortgage lenders will generally require at a minimum at least 15% of the value of the home. Naturally the higher the down payment, the more likely it is that you will qualify for a mortgage. Occasionally, exceptions are made whereby 10% down payment will be sufficient, as mentioned with bad credit this is rare and will hinge on the other aspects of the overall deal, such as income, job stability and to the extent of damage to the credit. If your credit warrants you having to deal with a sub-prime or private lender then you will need at a minimum 20% equity. Unfortunately higher down payments come with the territory if you have bad credit.

3. Income

Even with these non-conventional lenders in order to qualify for a mortgage you must have enough income to repay the mortgage. Now these lenders are not nearly as adamant about debt service ratios as traditional lenders but even they will want to ensure there is sufficient cash flow to make the monthly mortgage payments. Conventional lenders will often look at GDSR, which is the percentage of your gross monthly income that can be used for housing costs (mortgage payment, utilities and property taxes). Now conventional lenders generally prefer a GDSR in the range of 30% to 35%. Simply put if you have gross monthly income of $4,000, a 33% GDSR implies that your mortgage and housing costs cannot exceed $1320 per month. Another one is TDSR (total debt service ratio) this is basically all of your debts combined including the mortgage, with conventional lenders this will in the range of 42%-44% depending on the lender. With non-conventional or "B" lenders they will often not want to see numbers in the range of 40% for GDSR and 50% for TDSR. Now with strictly sub-prime or private lenders these numbers are fairly flexible, with even higher ranges. Self - employed clients quite often have to rely upon financing through these programs as many do not simply show enough taxable income to qualify under conventional guidelines. 

4. Credit Requirements

At a minimum most non-conventional lenders require that you have some form of a credit rating. Now there are times when they will lend to those who have no credit rating at all, provided the balance of the deal makes sense, especially the equity. Even though the credit score is not as imperative to non-conventional lenders they do have some minimums, beacons or credit scores of around 450 to 500. Again there is some latitude with this, primarily what a lender will look for is to ensure that you're not in a "nose dive" as they don't want to be the ones left to pick up the pieces.

The mortgage needs to make investment sense for them, as that's exactly what it is to them, an investment. These lenders also have differing lending guidelines when compared to each other. Some will insist that any outstanding bad debts be paid off before they will lend the money, others will want to direct the solicitor to pay off debts from the proceeds while others will not care as long as the down payment/equity is sufficient to provide them with peace of mind.

Generally as a rule, you will want to make sure that you pay off as many debts as you can that are reporting on your credit bureau, as doing so will result in an overall improvement of your credit score. It's this improved credit score that you will need in the end to refinance your mortgage with a conventional lender.  Before you begin approaching lenders it's an excellent idea to pull your own credit bureau so you know exactly where you stand credit wise. Now a days with modern technology it's simple and easy, and you can do it online in minutes and for a nominal amount. Plus when you do it, it has the added benefit of not impacting your score, which is what happens when a lender does it. Once you've got the report in hand, confirm that everything is correct, any errors or inaccuracies should be dealt with immediately.

5. Previously Bankrupt

Even if you've declared bankruptcy in the past, you may still qualify for mortgaging today. Again the higher the down payment the greater the odds of getting approved, with both conventional and non-conventional lenders. With insured mortgage, ones with less than 20% down payment the insurers guidelines (CMHC, Genworth, AIG) as well as the lenders will apply when it comes to getting approved.

They will look at the circumstances surrounding your bankruptcy as well as what you've done to re-establish it since. With non-traditional lenders circumstances and re-establishment do factor into the deal however they are less of an issue because they are equity lenders and as such will offset this risk with a greater equity requirement from you. Getting re-established after a bankruptcy is not quite as challenging as you may believe, there are several lenders who will offer both secured credit cards and secured loans to previously bankrupt clients.

6. Rates & Fees

In most cases where a mortgage is taken out by a client with credit acceptable to a conventional lender, that lender pays a small commission to the mortgage broker. But when it comes to a non-conventional mortgage loan, it's the borrower who pays the mortgage broker his or her commission for the work done by the broker in securing financing. This fee is typically paid on closing out of the proceeds by the lawyer and is usually a percentage of the overall financing arranged. Fees will generally be in the range of 1% to 5% of the total financing amount, now if the mortgage is fairly small the broker may have a minimum that they charge.

Sometimes, there will also be lender fees charged by the non-conventional lender as well. 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. Again fees will be in the range of 1% to 3% and are typically paid on closing out of the proceeds by the lawyer.

In addition you will need to pay for the legal services that are required to be performed on your behalf by your lawyer, and in some cases depending on the lender you may also need to incur their legal expenses as well. Also any appraisal that is required will also need to be paid for by you. Again these may be paid out of the proceeds or the lender may require that you have the funds to cover them directly.

Finally like any other major financial decision make sure you do your homework and ensure you clearly understand the in's and out's of what you're signing and agreeing to because you don't want to chalk this up to being another financial mistake!

About the Author:

Kam Brar is a licensed mortgage broker and has been directly involved in the lending industry over the past 10 years, bringing with him a wealth of knowledge and experience. His particular specialty throughout his career has been working with "challenge" customers, where it takes creative financing (and sometimes private loans) to accomplish their goals.

His role with ShangriLoan is that of a consultant and mortgage industry liaison.



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