3 Jun

Credit Cards for the Credit Challenged

Credit

Posted by: Kelly Hudson

If you want to buy a home and don’t have a bucket load of cash – you are going to need a mortgage.

In order to get a mortgage, you are going to need credit…

When you get a mortgage, banks lend you “their” money and secure the loan against the property you are buying.  Therefore they want to know how you’ve handled credit in the past.

  • Bad credit = high interest rates
  • Really bad credit = NO mortgage

If you have bad credit, you need to improve your credit to get a mortgage/better interest rates.

When you have had credit challenges – you are going to be limited with the number of credit card companies willing to offer you credit.

In order to buy something on credit, most lenders follow the Rule of 2

  • 2 lines of credit (credit card, line of credit, loan etc.)
  • Minimum credit limit $2000
  • 2+ years (24+ months) history

One of the quickest ways to rebuild your credit is to get 2 credit cards.

Since you’ve had credit blemishes in the past, many credit card companies aren’t interested in giving you more credit.

  • If you have had any files that have gone to collections, you MUST pay those off ASAP.

One way to get a credit card for the credit challenged, is to get a secured credit card.

DEFINITION of Secured Credit Card

  • secured credit card is a credit card that requires a security deposit. Secured credit cards are generally for individuals whose credit is damaged or who have no credit history at all.
  • secured credit card works just like a traditional credit card. A secured credit card can help you establish or rebuild your credit.
  • The security deposit will depend on your previous credit history and the amount deposited in the account.
  • Security deposits for secured credit cards tend to range between 50% and 100%.
  • The security deposit can not be used to pay off the balance on the credit card.
  • Typically, secured credit card companies will increase the limit on your card once you have proved you are a good credit risk. This takes time. With continued good credit history over a few years, they will refund your security deposit and issue you a regular credit card.

Five Tips for Wisely Using a Secured Credit Card

  1. Use for small purchases you can pay off each month.
    • The point of using a secured credit card is to show your ability to responsibly charge and then pay off your balance.  To do this, make a few purchases each month and pay your bill in full.  By NOT carrying a balance you avoid paying interest & build your credit.
  2. Pay on time, and more than the minimum payment.
    • To get a healthy credit score – it is essential that you pay on time.  Ideally you want to pay off your balance in full.  If you can’t pay the full amount, pay down as much as you can, so you are reducing your credit utilization (the amount you owe compared to your credit limit).
  3. Make Multiple Payments every month.
    • Making more than one monthly payment can help keep your balance low.  A large balance reduces your overall credit which can negatively affect your credit score.  If you make a large purchase, pay it off quickly to keep your credit utilization low.
  4. Set Payment Alerts.
    • Even the most organized person misses a payment now and then… That’s OK for people with good credit… if you have credit blemishes you’ve lost your “get out of jail free” privilege.  One missed payment is one time too many!  Set up payment reminders 1 week before your payment is due.
  5. Enroll in Autopay.
    • If you are concerned about making your payments on time?  The easiest plan is to enroll in autopay, which allows your credit issuer to automatically deduct the monthly balance form your bank account, so you don’t have to keep track of bills. This assumes you have the money in the account to pay off the credit card.

I’ve worked with many clients that have had credit issues.  My clients have had success with Capital One Secured MasterCard and Canadian Tire cards.

For other options, check out this BLOG I found Top 6 Secured Credit Cards for Canadians

Please note: Prepaid Credit Cards do NOT help you build credit.  You’ve prepaid the amount on the card, so no one is actually offering you any credit. 

Need more information about credit… check out my BLOGs

Mortgages are complicated, but they don’t have to be… Engage an expert!

Give me a call and let’s discuss a mortgage that works for you (not the bank)!

Kelly Hudson
Mortgage Expert
DLC – Canadian Mortgage Experts
Mobile 604-312-5009
Kelly@KellyHudsonMortgages.com 
www.KellyHudsonMortgages.com

18 Jan

5 C’s of Credit to get a Mortgage

First Time Home Buyer

Posted by: Kelly Hudson

Whether you are buying your first home or have been a home owner for years, when you are looking at purchasing a property, finding the best mortgage solution for your specific situation can be an intimidating experience.

Working with a licenced mortgage broker will ease that tension, along with knowing the basics of what lenders are looking for will help you better understand the process.

 The Five C’s of Credit/Mortgages

The five Cs of credit is a system used by lenders to gauge the creditworthiness of potential borrowers. The system weighs five characteristics of the borrower and conditions of the mortgage, attempting to estimate the chance of default and, consequently, the risk of a financial loss for the lender.

Higher Risk = Higher Rates!

Know Your 5 C’s:

Every client has individual mortgage needs when buying a home and my goal is to find a mortgage loan that’s right fit for your situation! The first step in getting the mortgage process started involves understanding what lenders are looking for in order to get mortgage approval.

The approval process is called the Five C’s of Credit and they consist of:

  • Collateral– the property that you are planning to purchase
  • Credit – do you have good credit? Do you have a good history of repayment for all loans?
  • Capacity – Proof of being able to pay for your mortgage with your provable income
  • Capital – How much equity do you have in the property? The borrower’s net worth.
  • Character – The borrower’s willingness to repay the loan and their reliability
  1. Collateral 

    Collateral reflects the strength of the property itself.  Lenders look at if the property is owner occupied (do you live there) or is it a rental dwelling?  Is the property a home, condominium or cottage? Is the property located in a metropolitan neighbourhood or a rural area? Is there a single family living in the home or multiple families? All these factors are taken into consideration by the lender for marketability when rating your property. An appraisal is one of the tools used to assess the “current” value of the property.

BC Property Assessment vs Home Appraisal  

  1. Credit 

    Shows the lender a snapshot of what the borrower’s repayment history has been over a period of time. This is the only way a lender can predict the borrower’s propensity to make future payments. The credit score (also called credit history, credit report, credit rating) is the primary measurement factor.  When you borrow money, your repayment history is reported to the credit bureau – this rating is called your credit score.  How do you pay your bills – always on time or sometimes a few days late or not at all, will determine what type of credit rating will apply.  Some other factors that affect your credit rating are if your credit card balance is greater than 25-50% of your credit limit, if any accounts have gone to collection, or if there have been multiple inquiries into your credit.

Solving the Puzzle – 5 factors used in determining your Credit Score

8 Credit Rules You Need to Know, Before You Buy a Home

9½ Steps to Repair & Improve Your Credit

  1. Capacity 

    The most important by far! How are you going to pay for your mortgage? The lender’s main concern is how you intend to repay your mortgage and will consider your income (from all sources) against your monthly expenses.   Proof of income will differ depending on your employment status: salaried, commissioned, self-employed, full time, or part time.  Lenders will determine what types of documents are required to confirm your provable income and how much mortgage you can qualify for. This is represented as TDS Total Debt Service Ratio and GDS Gross Debt Service Ratio.

3 “Rules of Lending” what Banks look at when you apply for a Mortgage in Canada

  1. Capital 

    Capital refers to your personal net worth and how much equity you have in the property.  Where is your down payment coming from? In Canada your minimum down payment is 5% for a “high ratio” insured mortgage* or a “conventional” mortgage with 20% down. The down payment money can come from your own resources or can be gifted from a family member.

* Everything You Wanted to Know about Mortgage Default Insurance

  1. Character 

    Character is a subjective rating and basically reflects a combination of above 4 factors. Your character tells a story to the lender about your individual situation.  Lenders want to know that as a borrower, that you are trustworthy and will meet your payment obligations to them. Lenders will take factors such as length of employment, your tendency to save and use credit responsibly to establish your character and determine whether you are a borrower that they can trust with their mortgage.

The goal is to get a yes with your lender. The Five C’s of credit outlined above determine a borrower’s ability and willingness to make payments. Understanding what a lender is looking for allows you to set yourself up to put your best foot forward.

There you have it – the 5 C’s that lenders analyze when reviewing a mortgage application. 

If you have any questions or concerns feel free to contact me anytime, I’m here to help!

Mortgages are complicated… BUT they don’t have to be!  Engage an expert.

Give me a call and let’s discuss a mortgage that works for you (not the bank)! 

Kelly Hudson
Mortgage Expert
DLC – Canadian Mortgage Experts
Mobile: 604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com