Thursday, May 4, 2017

What you need to know about Bridge Financing!

A bridge loan is a short-term financing tool that helps you “bridge” the gap between old and new mortgages when you move from one home to another. You may be taking possession of your new home a week or two in advance of closing on your current home, either because of how your closing dates worked out, or because you want to do some renovating on your new home before you move in. Whatever the reason, bridge financing is going to be your best friend for a few weeks: making it possible to easily transition from the old to the new.

Here’s what you need to know:

  1. It’s for a specific amount, which is your home’s selling price minus your current mortgage and costs (realtor/legal).
  2. It’s for a short period of time i.e. 1 to 30 days, and your lender will want to see a firm sale agreement for your existing place, with conditions waived.
  3. Not all lenders offer bridge loans, although there are private lenders that meet this need. Since you are working with a mortgage broker, you are in good hands: I can put together a combination of a new mortgage and bridge loan even if it’s not with the same lender.
  4. Expect to pay more. Your bridge is going to be at a higher rate than your mortgage, and will include administration fees, even when the bridge loan is with the same lender. Bridge loans from private lenders will likely have higher rates and fees, although they may offer more flexible terms.
  5. Plan in advance just in case. Together we’ll discuss your ability to carry two mortgages in the event that a rare worst-case scenario plays out. Your lawyer will pay out your bridge loan from the sale proceeds of your home. If for any reason the sale falls through, your lawyer will register the bridge loan as a charge on the property. And if you require a longer bridge i.e over 30 days, or for an amount over the lender’s maximum, your lender may register a charge against the property and your costs will increase.

What is Your Credit Score?

Credit scores can range from 300 to 900 and are used by lenders to determine what kind of a risk you are likely to be as a borrower. Your score is based on several attributes -

Payment History:
The single biggest factor in your credit score is having a timely bill payment history. Recent late payments are factored more heavily than old ones so start today and never let a bill get past due. 

Amounts Owed:
Keeping your accounts near their maximum limit can signal that you don’t manage credit responsibly, and that you may have trouble making payments in the future.

Length of Credit History: 
The longer you have had credit in good standing, the better. Keep your oldest cards; that good history will help you, and don’t regularly take out new credit accounts.

Pursuit of New Credit:
Opening several credit accounts in a short period of time is a risk factor.  How many inquiries done on your behalf can also have an effect on your score.  

Types of Credit:
A healthy mix of credit i.e. car loan, mortgage and credit card is more positive than a concentration of debt in only credit cards.

With an excellent credit score (750 and over), lenders will give you a quick mortgage approval at the best possible rates. This score says you are reliable and responsible with debt. At a lower score (below 620), you likely won’t get the best mortgage rates, you may require a larger downpayment, there could be extra fees, and you may even find it difficult to qualify.
Your credit score can change from month to month, which means you can boost your score relatively quickly with the right credit behaviour. We can review your situation and discuss how your score will be viewed by lenders and, if necessary, outline your best options for credit improvement. If you want to get a mortgage while you work on bettering your score, we can also advise how that may be possible.  

Saturday, February 18, 2017

Buying a Home after Bankruptcy?

If you’ve declared bankruptcy in the past, know that you’re not alone.  Further, know that your situation is nothing to be ashamed of.  No one wants to declare bankruptcy; sometimes, it may be the only solution to a difficult situation.  If you’re now thinking of buying a home after bankruptcy, you may be wondering how it would work.

I see lots of clients after their bankruptcy has been discharged or their consumer proposal has been completed. It’s very common to hear that they’ve dropped in at their bank branch or another mortgage broker, and they have either been turned down or found that their calls for information don’t get returned. (Pet peeve alert!)  This may give the mistaken impression that there is nothing to be done.  Don’t be discouraged!  You can and will put this behind you, with the right planning and commitment.

You CAN get a mortgage after bankruptcy. Here’s what you need to know.

You do need to be aware that buying a home after bankruptcy is not the same as buying a home for the first time with no credit issues. There are two main factors:
  • How long ago was your bankruptcy discharged, or your consumer proposal completed?
  • How long have you been re-establishing your credit, and how extensive is that credit?
The mortgage options available to you depend on the answers to these questions.  In a nutshell, you will be looking at either a mainstream or alternative lender.

Mortgage after bankruptcy with a mainstream or “prime” mortgage lender

With a prime lender, you will have the luxury of being able to purchase a home at the best rates available. In addition, a mainstream lender will allow you to use a down payment of as little as 5% of the purchase price of the home.  One thing to note: if your down payment is less than 20% of the home’s purchase price, lenders will require default insurance through either CMHC or Genworth; the fee charged will be added to your mortgage amount (the cost is calculated on a sliding scale: 1.80% – 3.60% of the amount of your mortgage).

In order to qualify with a prime lender after bankruptcy, you need to fulfill the following criteria:

1.  The down payment must be from your own resources – either in a savings account, an RRSP, investment account, and so on.   As of February 16, 2016, you need to have at least 5% available for the first $500,000 of your purchase, 10% for any amount over $500,000.   However, 10% of the purchase price is better, and will give you more options.
2.  To work with a prime lender, you need to wait for a minimum of two years after discharge of your bankruptcy.  Please note that this is a best case scenario, not a sure thing.  Each lender has their own criteria.  A few will do a mortgage two years after, several more require three years, and some want you to wait five or six.
3.  To work with an “A” lender after bankruptcy, you must also be able to show at least two years of solid, re-established credit.  A little more about this point…  As soon as your bankruptcy is discharged, you should be focusing on rebuilding your credit.  Ideally, what you want to end up with, is a two year track record, minimum, on each piece of credit (also known as a “trade line”) you have.  The credit can be made up of two major credit cards with a limit of  at least $2000-3000 each, an unsecured line of credit with at least a $2000 limit, a loan or car lease, or some combination of those.  Unsecured credit is best, and you need to have at least two trade lines.  Every single credit transaction following your bankruptcy has to be absolutely perfect.  Make your payments on time, and in the case of credit cards and lines of credit, keep your balance at a maximum of 30% of the limit on the card.  

Mortgage after bankruptcy with an alternative mortgage lender, or “B” lender

An alternative lender will work with you as early as one day after your bankruptcy discharge, and with little or no re-established credit.   However, in exchange for this flexibility, what they will look for is the following:
1.  Your down payment will need to be at least 15% of the purchase price of your home.  If you have 20-25% down, that will give you more options.  
2.  Your costs will be higher with a “B” lender than with a mainstream lender.  First, your interest rate will be a bit higher; how much higher depends on the “big picture” of your overall financial situation, how large your down payment is, and how good your re-established credit is.  You can expect to add at least one percentage point over mainstream rates, possibly more.  Second, you can expect to pay a lender commitment fee – typically around 1% of your mortgage value – similar to the Genworth or CMHC mortgage insurance fee mentioned above.  If your down payment is more than 20%, you might be able to add the commitment fee to your mortgage rather than paying this out of pocket, but this is up to the lender.
3.  You’ll need to obtain a full appraisal before the lender will sign off on the mortgage.  This means that if you’re buying a home after bankruptcy, when you’re writing up your Offer to Purchase, you need to include enough time in your “financing clause” to allow for the appraisal to be conducted, written up, and reviewed by the lender.  Ideally, you should have at least a 5 business day financing clause.

Keep in mind that your alternative mortgage lender or B lender is exactly that: an alternative, or a stepping stone to get you where you want to go.

If you focus on rebuilding your financial situation and improving your credit, usually in 1-3 years you can move back into mainstream territory.

Discuss your options with a mortgage professional

If you do wish to purchase a home, and you have a bankruptcy or consumer proposal in your past, the most important recommendation I have is not to rush into anything.  Same goes for re-financing a mortgage after bankruptcy.  Talk to a knowledgeable mortgage professional who is experienced in helping people get a mortgage after bankruptcy so that you can understand and evaluate your options, and figure out which one is best for you.