2nd Mortgages Improve Cash Flow and Credit Scores
2nd Mortgages CAN Improve Cash flow and Credit Scores
Many homeowners are working hard today but living pay cheque to pay cheque as a result of the combined amount of minimum payments they are making each month to service their debt.
You likely cant recall a time that your bank called you to offer you a consolidation loan because it was in your best interests. A constant barrage of marketing trains us to believe that your bank is there to help you...but to help you; they would need to hurt themselves...which is why you probably havent received that call from your bank.
When making minimum payments on accumulated debt becomes a cash flow problem, most people apply to their bank for a consolidation loan. A consolidation loan simply combines all the debt one owes into one large amount, which you make one monthly payment on. However, when the bank sees that the applicant is already using all (or just about all) of their available credit, they will decline the loan as the applicant is determined to be at a high-risk of defaulting. The truth is, there may never have been a late payment in 30 years, so in fact, the applicant has demonstrated just the opposite of someone that is likely to default as they ensure their minimum payments are made no matter what. The loan is declined merely as it is not in the banks best interests to approve it.
Some people that have been declined by their bank for a consolidation loan may approach companies that offer personal loans to consolidate debt. Sadly, these companies continue to trap people into an even worse situation, as they will wrap your debt into a loan where (almost)everything you pay goes to interest and there is no exit strategy. These types of high-interest loan companies have rates that often start at 20% and can go up to as much 45% interest per month.
If high-interest loan companies cant help or you choose not to work with them; you may have been advised to look into doing a Consumer Proposal or filing for Bankruptcy. You CANNOT imagine the number of homeowners with equity in real estate that have taken one of these approaches because they didnt know they had better options. From a mortgage financing standpoint;whether you file a Proposal or go Bankrupt, the effect on your credit bureau is precisely the same. You do not score any points for doing the proposal and trying to pay off your debt...which makes no sense at all.
From a credit score standpoint; the longer you go with your accounts near or at their limits;the lower your Equifax Beacon score will be. If you have made multiple attempts at obtaining a consolidation loan and were declined, your credit score will drop even further. Some people have not missed a payment in 30 years but have a score of under 650...which again makes no sense.
Banks judge your character based on your credit score. It does not matter whether you have been a customer of that institution for 30 years, have family members that bank there, or have multiple products with the bank; none of it has carries any weight when you apply for new credit.
What I have learned from years in the business is that there is next to no correlation between people carrying high amounts of debt, and their level of financial responsibility.
People carrying significant amounts of debt do so because of one of these life occurring events:
1) Relationship Breakdown
4) Job loss
Debt can also include Property or Income Tax arrears; which really needs to get addressed quickly. If you wait too long; you could find a lien placed on your home.
Credit is relatively easy to get today, and the government doesnt protect you from predatory lenders that trap you into a loan with no exit strategy. In 2018, Banks are making millions; while an increasing number of homeowners are struggling with debt. For some unknown reason;instead of helping Canadians build wealth and or improve their financial position thru real estate, the government chooses to find new ways to force people into a worse financial position by continually tightening up the mortgage regulations where you can borrow money at about 3% interest today.
If you are at the point of speaking with a licensed insolvency trustee about a Proposal or Bankruptcy, keep in mind that they may not be aware that you can leverage your real estate to improve your financial situation, while simultaneously improving your credit file. Please note that you can still get a reduction/settlement on the amount of debt you owe; without hurting your credit file and we can help you with that.
A 2nd mortgage allows you to take equity (money) out of your home to reduce or payout debt. One of the great things about this product is that it does not appear on your credit file in most cases, so your credit is unaffected by it. You permanently transfer the debt reporting on your credit file into a mortgage which will make a dramatic improvement to your credit score.
Below is an example of a clients situation that I met in December 2017; at that time his credit score was 637. The first (black) chart below shows what things looked like when he came to me. The second chart (blue) reflects what things looked like after we restructured the debt with a 2nd mortgage.
1)Client realized an additional $672 in monthly cash flow
2)Credit Score that went from 637 to 725 in only a few months.
Helping people and making a difference is something that I love to do. If your bank says no to debt consolidation; make me your next phone call as I would be happy to help you.
Remember there is nothing to be embarrassed about as high debt and bruised credit happens to just about everyone at some point. Things arent easy and money is tight for most people.
Realtors Looking for New Business
This deal was recently done by aTop Broker in Ottawa. The client was referred to her by a Real Estate Agent who was representing the client as a purchaser looking to buy an investment property.
60 years old, retired receives minimal pension income with sporadic other income that is difficult to confirm. There was an approval at a conventional lender, but the conditions were not able to be met to verify income.
Principal Residence (value $625k) no mortgage outstanding
Purchasing an investment property for $210k
Set up a Reverse Mortgage with a limit of $210K, fully advanced to finance the purchase of the condo.
She was able to leave her investment portfolio to continue to grow.
She is generating some additional investment income, as well as having an asset that continues to appreciate
The accruing interest on her Reverse Mortgage is tax deductible as it is being used for investment purposes.
Client increased cash flow, leveraged her assets without collapsing investment to purchase an income generating and appreciating asset.
Real Estate Agent satisfied client, sold a property, partner referral
Mortgage Broker new client, commission, helped a referral partner with their business retention
Debt Service Ratios - Easy to Understand
Debt Servicing Ratios are a big part of how a lender determines how much money you will qualify to borrow.
Debt Servicing Ratios are split into two categories:
GDS - Gross Debt Service refers to housing costs only.
TDS - Total Debt Service = housing costs + other debt payments.
There is often little correlation between the amount of income we can use on your application and what your actual income is unless you are on a fixed salary or pension.
Monthly Mortgage Payments and Minimum Debt Servicing Payments are also determined by lending guidelines and are not based on actual numbers when it comes to determining how much you will qualify to borrow.
It is quite common for buyers to struggle with the gap that exists between what they consider affordable and what the bank considers affordable. The issue come downs to the fact that the buyer knows what they can afford, but the lender (bound by guidelines and policy) disagrees. If the buyer hits this wall, they will need explanations, information, and guidance to keep everything moving forward. As a broker, my approach is to try and close (as much of) the gap that exists between the buyers expectations and the lenders thru my access to multiple financial institutions programs.
As we enter 2018, an increased amount of time is needed to secure financing in a great number of instances. The financing process has become increasingly challenging and is often frustrating for everyone involved in the transaction. As a Mortgage Broker, I am representing both the client and lender in the transaction, and both sides need to be comfortable or the financing simply doesnt get done.