Check Your Credit First

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1 I hear the same thing from many aspiring first time home owners: they would LOVE to buy a home, but they have difficulty in getting approved for financing. There are 3 key items banks are looking at when deciding to grant a mortgage: Credit (do they trust you to pay them back?) Income (do you have enough income to pay back?) Downpayment (potentially can be 0% if credit is high enough) The majority of this article will cover how to build and maintain good credit, in general terms. I fully recommend the use of a mortgage broker (as well as a meeting with myself) to be truly beneficial. Check Your Credit First It s been said the quickest way of figuring out where you are going is to first find out where you are NOW. We have two credit agencies in Canada, Transunion.ca and Equifax.ca. They take literally HUNDRED of pieces of information about you and data crunch you down into a 3 digit number (sounds impersonal). As the vast majority of credit reports contain errors, it is best to fix these and correct obvious problems. Here is how bad these reports can be in errors (taken from a US sample): 25% Had serious errors that could result in a denial of credit 54% Incorrect personal demographic, long outdated, belonged to a stranger, or was just wrong 22% Listed the same mortgage/loan twice 8% Missing major credit/loan/mortgage that would demonstrate creditworthiness

2 30% Contained accounts that had been closed by the consumer but still listed as active 79% Contained either serious errors or other mistakes So, let s see what is on our report. And, if there are things wrong, there are ways of fixing what s wrong. We CAN ask them to mail our information to us (free), but the Equifax and Transunion are smart. They argue that our history is our information to view, but how they crunch the data to arrive at the 3 digit number that aids banks in deciding to give credit is THEIRS and we need to pay for it. It costs $24 at Equifax. Equifax Transunion Website e.jsp?lang=en&loc=2018 Consumer Disclosure (no score) Report errors formation_centre/docs/request_report_form_e.pdf /dispute_process.jsp merdisclosure_en.page? page? Almost ALL of the mortgage brokers I know rely on Equifax, although the mortgage insurer (I ll explain mortgage insurance, amongst other items in person) will often check both. In theory, Transunion SHOULD closely mirror Equifax. I personally recommend that everyone checks their credit once or twice a year. After reviewing and insuring that there are no errors in the report (and correcting the errors with the reports provided), we review for unpaid debts and/or collections. The theory is that if we haven t managed to pay our current debts on time, why would a lender lend you more money. These collections will often show as R9 or I9 on the reports; these are huge red flags. I have seen clients be COMPLETELY surprised by what they find on their credit report. While utility/cell bills do not appear when you pay on time, they will report if you owe them money. I saw one client that had moved years prior, and a partial payment to Enmax somehow fell through the cracks. It was

3 for under $20. This unpaid debt, affected the credit report, and raised a red flag. The client had not known why she had been turned down for credit cards and a car loan. All over $20. Pay it off. Pull your credit report a few months later and you ll notice a SIGNIFIGANT difference in the score. What came first? The Chicken or the Egg? People say that they can t get a credit card because they have no credit. They have no credit as they don t have a credit card. We do have some options to help here. Do these steps: 1. Go and see the bank you already deal with. They might give you a SMALL card to start with. Maybe, maybe not 2. If not, get a SECURED CREDIT CARD. Essentially we GIVE the bank money up front, and they give us the card. I like to think of it as a DEBIT card that shows up to the outside world as a CREDIT card. Many banks will offer these (use your bank if it does), but if not, try Home Trust. According to them, virtually everyone is approved. Three questions: a) are you currently employed? b) are you currently in bankruptcy? c) do you have the money? That easy. Send cheque, wait for credit card in mail. 3. Get STORE CREDIT. Stores WANT to give you credit to buy things in their places. They make money by selling you something and have a higher chance of converting you into a loyal customer (which is want you SHOULD become, as you should use the card at least once monthly to be effective). We COULD get a Future Shop card, but a new surround sound speaker system every month isn t financially prudent. I suggest Hudson s Bay / Bay / Zeller s / Home Outfitters. They will give a card ON-THE-SPOT to anyone with a credit card (min $1000 limit). They ll actually print a paper card at the till, plastic card comes in the mail. That easy. And, you can buy everything from toothpaste to canned goods to dress shirts between Zellers/Bay. 4. Get some other credit. A sneaky way after you ve had a little while of established credit using Home Trust Secured Visa and shopping at Bay/Zellers is to go back to your bank and apply for a loan (min

4 $1500). Take the entire proceeds of the loan, and stick it in a new account. Setup automatic payments for the next year to pay it back monthly; you ll need to make a partial payment at the end of the year (extra interest, roughly $105 based on 12.4% interest). It s a set and forget credit builder. Ensure that all of your loans have a minimum limit of $1500. Seen from the banks eyes, how does a $500 credit card really prove how likely you are to pay back a loan of hundreds of thousands of dollars. The industry has gone with the limit of $1500. Inquiries What s the big deal? An inquiry is when anyone checks your credit. There are two types of inquiries, a hard inquiry and a soft inquiry. Whenever someone else checks your credit, it affects your credit score. A utility company checking if you need a deposit before they agree to provide you with services. The new cell phone company. The credit card company. The auto dealer. About 10% of your score is based upon your history of inquiries (hard). A soft inquiry is when YOU check your own score, and this has no impact on your credit. Role of Mortgage Brokers Clients often ask why I like mortgage brokers. Why can t they just walk into their bank and get the loan they want? Some clients can. But, do they know what the best rate is? And, if their chosen bank turns them down, already haven done an inquiry, what then? Go to another bank. If that bank turns them down as well, what of the effect of these inquiries on their credit. Enough inquiries, enough damage to the credit, and no bank may give you credit (at least not at the discount rate). If I have a mortgage broker work on your behalf, they only pull the credit ONCE, and store a digital copy of your credit that is forwarded to the lender. If that lender turns the file down, he then forwards it to second lender, still

5 using the same credit inquiry. Or a third or fourth. And, you can be assured that you will be getting the lowest possible rate. Summary Follow these steps, and anyone can establish and maintain decent credit. And, if the credit is good enough, there are mortgages available that require NO downpayment (essentially, you ve earned a higher level of trust; allows you to either borrow the downpayment or to use a cashback mortgage). I d be happy to sit down and explain how this applies to your individual situation, as well as explain mortgage rates, amortization, negotiation, closing, home inspections, mortgage insurance, ratios (TDS/GDS), etc. I know that much of this might seem complex, but as we go over things and we go through your purchase, I ll continue to educate, advise and help you. I firmly believe that an educated consumer is a good consumer.