QUALIFYING STANDARDS, NORMAL LENDER
All lenders appraise your ability to repay a mortgage by the same rules.
The rules are based on your payment to income ratios. These ratios,
termed GDS (Gross Debt Service) and TDS (Total Debt Service), are the proving
ground for all lender decisions on whether or not you will get approved
to borrow that Lender's money. The system calls for maximum payments on
the house (inclusive of taxes and heat) not to exceed 32% of gross family
income, and all payment of debt (inclusive of house) not to exceed 42%
of gross family income. If you fit the guidelines, and your credit
is good, chances are you will get approved. If your payment to income
ratios exceed the norms, no matter how good your credit is, chances are
the Lender will decline your application. The pre-approved mortgage
in your possession may be worthless.
ONE MUST QUALIFY AS AN EMPLOYED PERSON, AND NOT BUSINESS-FOR-SELF,
AND ONE'S CREDIT MUST BE GOOD. If you are self-employed, or
commissioned, you may be walking into a two edged sword!
THE PROPERTY, NORMAL LENDER
The property will be scrutinized as an "owner occupied" unit. The location parameters are never discussed when applying for either a pre-approval or an actual mortgage. Lenders always reserve the right to decide whether a property fits their portfolio. If your property has the postal code of "E-I-E-I-O" (country property), or if there is work to be done on the property to bring it up to standards, even if your mortgage is approved, the deal may still get turned down! If you are a normal borrower, Canada Mortgage & Housing Corp. (CMHC) may be your saving grace. The lender may require the property to be insured against default through CMHC. The role of CMHC is to protect the lender in case of default. Lenders are supposed to do their "due diligence" before submitting the file to CMHC, although a few use the "default" insurance as an assurance that they are protected in case you default.
Falling through the cracks!
When an applicant is self-employed, or commissioned, lending institutions as a whole, will insist on qualifying you by way of "net taxable income", rather than gross income like a salaried employee. To prove your income, you will be asked to produce your last three years' worth of Revenue Canada Assessment Notices, to prove an average taxable income. This average will be used to qualify the applicant's GDS and TDS, as above. If you had a bad year, or if you are doing very well this year, chances are you won't qualify because your averaged income is too low to fit under normal guidelines.
When an applicant has less than a virtuous credit history (anything worse than an R-3), even with a satisfactory explanation as to why the credit imperfection occurred, no matter what you income shows, your mortgage may get rejected. Lending institutions, as a whole, now use computer profile approval systems. Anything worse than an R-3 on the Credit Bureau may trigger a rejection model. Further analysis by the computer into down payment, length of job stability or residential stability, credit scoring, type of job, is done in an instant; then the answer is normally negative.
Bankruptcies are a sign of the times. The credit bureau will attach
the information to your file, and keep it there for seven years.
Various trustees differ in their presentation to the general public.
Some will advise their clients that the stigma of the bankruptcy and/or
the credit reporting of the bankruptcy may cause them difficulty for up
to seven years; while others avoid the conversation or tell their clients
that lenders will talk to them immediately after the "discharge".
Lending institutions differ in their policies with respect to discharged
bankrupts.
Some Banks (we won't name names, but a comic book caped crusader has
the same starting letter on the front of his outfit) won't deal with a
former bankrupt at all (while it still shows on the credit bureau), while
some banks will deal after two years (CMHC insured) or four years without
CMHC.
A "proposal" under the Bankruptcy Act may be worse than an actual bankruptcy
because until the proposal is over or paid, your existing creditors may
have a real problem with you coming up with the down payment to buy a home.
Now that I have deflated most of you, let's now delve into the promised
land. If you have at least one of the following list of requirements,
you can be approved today for a mortgage.
A) a good salaried job with tenure of at least two years, and
if former bankrupt, discharged for at least one year;
B) great credit ratings;
C) a large down payment.
As we have discussed in the past, there are lending institutions that
see prior credit and/or bankruptcies as a "niche" in the marketplace.
These institutional lenders will advance mortgage funds provided you fit
one of the above slots. These lenders recognize the fact that you
may have difficulty obtaining a "normal" mortgage so you, as a Consumer,
can expect to pay higher rates and/or fees. The higher rates are
in the 9-10% range. Not bad when you relate to the average mortgage
rate for A-1 consumers over the last ten years has indeed been 10%.
Circumstances can create tarnished credit situations, but finally the
marketplace is responding with specialized mortgage lenders who will listen
to what caused the problem in the first place and seek assurances from
you that the problem has been corrected. Solutions lie as close as
your telephone.