No Income Mortgages

For years it was almost impossible for self employed or commissioned sales people to get financing for a home. Problems consists of

1)  Onerous and Intrusive demands: Years of financial records, tax returns and other paperwork made it difficult, if not impossible, to get a mortgage.

2)    Fluctuating incomes: Canadians with fluctuation incomes were treated as high risk clients and the amount of mortgages they were offered were far below what they could afford to pay or wanted.

3)   Not a long enough history: Business owners and commissioned sales people that had not been in business for 3-4 years could not provide the required documents whereas employees need only be at their jobs a few months.

4) Taxable Income Too Low: Many self employed and commissioned sales people write off a portion of their gross income with legitimate tax deductible expenses. This can make their net operating incomes look too low for the lenders. The problem then becomes, “If I write off all my legal expenses so I pay the least amount of income tax, the lenders won’t like my net income, and if I don’t claim all my legal expenses I will have a higher income that the lenders will like, but I will pay unnecessary taxes. Either way I have a problem.”

Finally there is an answer, No Income Verification Loans

Due to the highly competitive nature of our mortgage market, there are lenders that offer mortgages specifically designed for self employed and commissioned sales people. These lenders were smart enough to realise that there is a huge need for this type of product considering the high number of self employed and commissioned people in Canada.

No Income Verification loans mean exactly that. They resolve the 4 problems mentioned above.

1)  They eliminate most of the documents required making it easier, faster and less intrusive to get a mortgage.

2)  Fluctuating incomes from past years are not even looked at.

3) A long business history is not needed as years of financial statements are no longer required. Some lenders like to see that you have been operating for 2 years, but do not need a financial history.

4) Taxable income too low; these mortgages are granted on stated income rather than net taxable income. This allows you to continue to use all legal means possible to reduce your income taxes without hurting the possibility of qualifying for a mortgage.

New products – Bigger mortgages

Up to 90% Financing

As more and more Canadians move from traditional employment jobs to self employed or commissioned jobs, the mortgage market is motivated to develop more products.

Up until recently No Income Verification mortgages were limited to a maximum of 75% of the value of the property. Now that GE insurance has joined the market and provided mortgage default to lenders on No Income Verification loans, we are seeing loans as high as 90% of the value and still with No Income Verification.

Finally, self employed and commissioned sales people are being treated with the respect they deserve, fast and easy approvals and good discounted rates.

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Credit Fitness

Most lenders look at the five “Cs” of credit before granting a loan or issuing a credit card:

Character is a reflection of your stability and willingness to repay credit obligations. Have you used credit before and paid it back on time? Is your application completed accurately and honestly? Have you moved or changed jobs often?

apacity is a look at your earning power, current income, and credit commitments. Can you really afford a loan now?

Capital is your net worth (the difference between what is yours, free and clear, and your debts). This includes an in-depth look at your total financial situation, including the value of your home and other assets.

Collateral is an item of value you own that can be promised to the lender. If you don’t repay your loan, the lender has the right to take your collateral. By pledging collateral, you can sometimes get a large loan or lower interest rate – that’s because you’re more likely to pay back the loan when something you value is at stake, so the lender may be taking a smaller risk.

Conditions include the national and local economic picture. Are there lots of layoffs or are employers hiring more people?

Your Credit Bureau

Your Credit Score
What is a credit score?
Your credit score and rating are produced by Equifax. Your credit score is also referred to as a FICO Score as the mathematical formulas behind your score were created by Fair Isaac & Company (FICO). This Credit Score is used by most lenders to help them decide whether or not you’re a good credit risk. Equifax crunches the numbers from your credit report, and spits out a score somewhere between 300 and 850. A low score says you’re a bad credit risk, a score of 750 or higher puts you in the driver’s seat.

Here are the factors considered when calculating your credit score and an estimate of how heavily each factor might be weighted.

  • Past payment history (35 percent): bankruptcies, late payments, past due accounts and wage attachments
  • Amount of credit owing (30 percent): amount owed on accounts, proportion of balances to total credit limits
  • Length of time credit established (15 percent): time since accounts opened, time since account activity
  • Search for and acquisition of new credit (10 percent): number of recent credit inquiries, number of recently opened accounts
  • Types of credit established (10 percent): number of various types of accounts (credit cards, retail accounts, mortgage).

credit_score_criteria

Below you will find the distributions of Credit Score for Canadians and a brief explanation of the factors considered when calculating your credit score.

canada_credit_score_distribution

Understanding the graph: This chart shows the percentage of people who score in specific FICO score ranges. For example, about 4% of Canadian consumers have a FICO score between 550 and 599. A score of 760 places you in the 750-799 range, along with 27% of the total population. (Note that the score ranges shown above are provided for your information, but they do not necessarily correspond to any particular lender’s policies for extending credit.)

A summary of factors that affect your credit score:

The FICO score is calculated based on the information contained in your Equifax credit history. While knowing your actual score is a good start, understanding the key factors affecting your FICO score is much more important. These factors will provide you direction on how you can increase or maintain your FICO score over time.
The negative factors listed below are reasons why your FICO score might mot be very high. Your focus on these factors will help you to raise your FICO score over time. These negative factors are provided in order of impact to your score, the first factor listed indicates where you stand to gain the most points over time and so on.

 

You have recently been seeking credit as reflected by the number of inquiries posted on your credit file in the last 12 months

Research shows that consumers who are seeking new credit accounts are riskier than consumers who are not seeking credit. Inquiries are the only information lenders have that indicates a consumer is actively seeking credit.

There are different types of inquiries that reside on your credit bureau report. The score only considers those inquiries that were posted as a result of you applying for credit. Other types of inquiries, such as account review inquiries (where a lender with whom you have an account has received your credit report) or consumer disclosure inquiries (where you have requested a copy of your own report) are not considered by the score.

The scores can identify “rate shopping” so that one credit search leading to multiple inquiries being reported is usually only counted as a single inquiry. For most consumers, the presence of a few inquiries on your credit file has a limited impact on FICO scores.

A common misperception is that every single inquiry will drop your score a certain number of points. This is not true. The impact of inquiries on your score will vary – depending on your overall credit profile. Inquiries will usually have a larger impact on the score for consumers with limited credit history and on consumers with previous late payments. The most prudent action to raise your score over time is to apply for credit only when you need it.
As time passes the age of your most recent inquiry will increase and your score will rise as a result, provided you do not apply for additional credit in the meantime. Our best recommendation – apply for credit only when you need it.

 

The length of time your revolving or non-revolving accounts have been established is too short


This reason is based on the age of the revolving or non-revolving charge accounts on your credit bureau report. A revolving account such as Visa, MasterCard, or retail store card allows consumers to make a minimum monthly payment and roll or “revolve” the remainder of their balance to the next month. Non-revolving accounts such as American Express and Diners Club must be paid off in full each month.

Research shows that consumers with longer credit histories have better repayment risk than those with shorter credit histories. Also, consumers who frequently open new accounts have greater repayment risk than those who do not.
It is a good idea to only apply for credit when you really need it. Meanwhile, maintain low-to-moderate balances and be sure to make your payments on time. Your score should improve as your revolving credit history ages.

 

The amount owed on your accounts is too high

The score measures how much you owe on the accounts (revolving, non-revolving, and installment) that are listed on your credit bureau report. Research reveals that consumers owing larger amounts on their credit accounts have greater future repayment risk than those who owe less. (For credit cards, the total outstanding balance on your last statement is generally the amount that will show in your credit bureau report. Note that even if you pay off your credit cards in full each and every month, your credit bureau report may show the last billing statement balance on those accounts.)
Paying off your debts and maintaining low balances will help to improve your credit score. Consolidating or moving your debt around from one account to another will usually not, however, raise your score, since the same amount is still owed.

 

Proportion of loan balances to original loan amounts is too high


Simply having installment loans and owing money on them does not mean you are a high-risk borrower. To the contrary, paying down installment loans is a good sign that you are able and willing to manage and repay debt, and evidence of successful repayment weighs favorably on your credit rating. The FICO score examines many aspects of your current installment loan and revolving balances. One measurement is to compare outstanding installment balances against the original loan amounts. Generally, the closer the loans are to being fully paid off, the better the score. Compared to other measurements of indebtedness, however, this has limited influence on the FICO score.
Paying down installment loans on a timely basis generally reflects well on your credit score. But if you want to improve your score, one way to do it is to try to pay the loans, down as quickly as you can.

 

What if you get yourself into credit trouble?

Unfortunately, it’s very easy to overextend yourself financially. Credit cards can lead to impulse buying because you feel like you have more money than you do. Or you might be laid off or become ill and be unable to pay your debts. The most important thing in these instances is to ask your creditors for help. Most will be willing to set up a new payment schedule to fit your situation. They’d rather receive part of the money now than none of it.

The best way to stay out of credit trouble is to set up a budget and stick to it. Most people in trouble are spending much more money than they earn each month. Perhaps a debt consolidation loan could help. This kind of loan gives you money to pay off all your other bills. You then pay back the amount you borrowed to one lender.

 

Understanding your credit rights

When applying for credit, it’s in your best interest to know and understand your rights. Various provincial and federal acts — such as consumer protection acts, cost of credit disclosure, and human rights legislation — forbid creditors from discriminating against any applicant on various grounds including race, creed, ethnic origin, gender or marital status.

When applying for credit, be aware of discriminatory practices such as:

  • Denying credit due to change in marital status
  • Not considering child and spousal support as income
  • Refusing a person credit because of the credit rating of the spouse (unless it’s a joint account)
  • Refusing to consider a spouse’s income when a couple applies for joint credit
  • Demanding financial information about a spouse when the applicant is individually creditworthy
  • Terminating or revising terms for a credit transaction because of a change in the applicant’s name/marital status (as long as no change has occurred in the borrower’s willingness or ability to pay

Credit, Debt and Personal Loans

Personal loans can be obtained to help you buy a new car, a computer, take that dream vacation or pay off several debts. Here are some examples of types of personal loans and loan information that you should know.

Secured versus Unsecured Loans

When you apply for a loan, you may be asked to provide some sort of security or collateral. If you can provide security in the form of a car or property, it means that the creditor may obtain whatever was established as security in the even you are unable to make payments and if the loan cannot be renegotiated. Often with unsecured loans, the interest rate may be higher, or the loan may be more difficult to obtain in the first place because of the perceived higher risk that must be taken on by the creditor.

Quick Definitions

Secured loan: A loan that is made safe, or backed, by marketable values (collateral).

Unsecured loan: An unsecured loan or debt is a personal loan in which no collateral is pledged. The only evidence of an unsecured loan is a signed Note.

A home equity loan: This loan puts your home to work for you. By assessing the value of your home, minus what you owe on your mortgage, the remainder may be available to you in the form of a loan (certain conditions and restrictions apply).

Refinancing loans or consolidation loans: These loans pay off your creditors, leaving you with just one payment to manage. Your interest rate may be reduced in some instances, which could lead to a lower monthly payment.

Retail and sales finance loans: When you purchase a product on a retail sales program (such as no payments for 12 months, same as cash, etc), that purchase is made possible by a financial institution. If, at the end of that term you are not able to make the agreed payments, the financial institution will provide you with a personal loan or revolving balance.

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First Time Home Buyers

When you purchase your home, there are a number of key players who will help you along the process.

Your Realtor
Your Realtor is your partner in the home buying process.

Once your Realtor understands what type of home you are looking for, they will begin researching the market on your behalf. They will search all the available properties for sale and will show you the ones in your price range that meet your criteria. Once you have found the home you are interested in, your Realtor will prepare an offer and represent you in the negotiation process.

Generally you do not pay a fee to the realtor who represents you when you are buying a home. The realtor is paid by the seller of the home. Realtors are licensed through provincial bodies and are knowledgeable about the markets they work in.

Your Mortgage Broker
Your mortgage broker is another key partner in the home buying process.

Your mortgage broker will take time to understand your financial needs and will research the market to find the best mortgage for you. Your mortgage broker will represent you to the lenders, and will negotiate terms on your behalf.

Usually there are no fees to use a mortgage broker, as they are paid by the lenders. There are some circumstances where lender fees will apply.

Lender
Your mortgage broker will choose the lender that best suits your requirements. The majority of your contact with the lender will be after your mortgage funds. You will receive contact information you can use when you want to make any changes to your mortgage in the future.

Insurer
If you have less than 25% of the value of the property as a down payment, you will be required to have mortgage insurance. Mortgage insurance protects your lender against any losses incurred. Your mortgage broker and lender will arrange this insurance for you. There are several mortgage  insurance companies in Canada including CMHC and GE.

Appraiser
The appraiser’s role is to provide the lender with a market value of the home. The market value is the price that the home would sell at with reasonable exposure on the market to a large number of buyers. Your mortgage broker will arrange the appraisal for you.

Home inspector
A home inspector provides you with information on the construction on your home. They will make you aware of any repairs that need to be done in the near future, and will let you know what types of repairs you can expect in the next few years. Your Realtor can provide you with some names of quality home inspectors.

Lawyer
Your lawyer (or notary) will transfer the property into your name, and will draw up and register mortgage documents. Your lawyer liaises with your lender and realtor to ensure they have all the required paperwork to process the sale. Your mortgage broker will refer you to a lawyer.

The Home Buying Process

Step 1: Pre-approval
When you first decide you want to purchase a home, it is wise to get a pre-approved mortgage. The pre-approval will tell you how much of a mortgage you qualify for, ensuring you are looking at homes in your price range.

Step 2: House Hunting
Once you know your price range, your realtor will begin researching the available properties and will show you homes that fit your criteria.

Step 3: Offer in and Accepted
Once you’ve found the home you are interested in, you will make an offer, subject to financing. Your offer may also have other subjects, such as subject to a satisfactory home inspection or subject to review of the strata minutes. Once the offer is accepted, you will provide a copy of the purchase agreement to the mortgage broker.

Step 4: Lender, Insurer, Appraisal
Your mortgage broker will work with the lender, insurer and appraiser to get you final approval on the financing. Your mortgage broker may ask you for further documentation at this time. You will want to collect the requested paperwork and submit it to your mortgage broker in a timely fashion.

Step 5: Firm Sale
Once you have met all your financing conditions, your mortgage broker will instruct you to remove the subject to financing. This is done with your realtor. You may remove other subjects at the same time, such as ‘subject to a satisfactory home inspection’. Once all the conditions are off, you have a ‘firm sale’. Instructions from the lender will be sent to the lawyer’s office at that time.

Step 6: Moving Details
The lawyer is now receiving and preparing mortgage documents. You will want to use this time to start preparing for the move. Please review our moving checklist to see some of the steps you may need to take.

Step 7: Lawyers
The lawyer will call you into sign, usually about 3-4 days prior to the completion date. The completion date is the day that the money is given to the sellers and the property is transferred into your name.

Step 8: Move In
Usually your possession date will be the day after the completion date. This is the day that you receive keys and can move into your new home.

Step 9: First Mortgage Payment
Unlike with rent, you pay your mortgage at the end of the month. (If the purchase of your home was completed on June 1, and you chose monthly payments, you will not have a mortgage payment until July 1. If you chose weekly payments, the payments would come out at the end of every week.) You will receive the details of the mortgage repayment from your mortgage lender.

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