How to ensure you get a Canada mortgage

As a licensed Canadian mortgage broker, I see daily what happens to folks who are applying for a Canada mortgage with "less than perfect" credit. They are folks that have their heart set on acquiring a mortgage with the best rates and terms.

These clients usually fall into 2 categories. They are either renters, who wish to get into the housing market by buying a house, or they already own a home and they wish to either take out a Canadian equity loan or refinance their existing mortgage.

And the last thing that both of these groups think about when applying for a mortgage is their credit rating. And invariably, there is usually something on their credit report that is either somewhat negative or destructively negative.

Let’s take a step back for a moment. What is a credit report and why is it so important when applying for a mortgage? (You can find more info at http://www.low-cost-home-refinancing.com)

A credit report is a document that shows your credit history in terms of what you owe and how faithful you have been at paying your debts on time.

In Canada, the 2 credit bureau companies are Equifax and Trans Union. Credit grantors, such as credit card companies and loan providers report to the credit bureaus on when credit was granted for a client, how much money was advanced or credit given, how much is left to pay and how "faithfully" the client has made payments on time.

Based on this info, the credit bureau creates a credit score. The maximum score you can get is 900. (I have never seen a 900. It seems to be an almost unattainable score, but I’m sure someone has done it).

Scores in the 700-800 range mean that you have very good credit and that you will have very little trouble getting a loan or mortgage.

Scores in the 580-699 are still OK, but lenders will look very closely at the trade line entries to see why the score has dropped.

Scores below 580 are in an area where getting a mortgage can be tricky. Rates may be higher to account for the higher risk.

Clients with scores below 500 find it difficult to secure a mortgage because they have shown an inability to pay their bills on time. They’ve probably had some accounts written off or gone to collection, or perhaps even had a previous bankruptcy. Lenders do not like to see this.

And rightfully so. Why would a lender want to lend money to a person who has shown very little care in paying their bills on time? Sure, there may be instances where the client has run into a crisis ie lost a job or had some unexpected bills crop up, but for the most part, folks with a low credit score are habitual poor payers.

Ok, having said all this, how does this impact a client who is applying for a mortgage and what can a client do to improve their credit rating?

Though very few clients ever do this, here’s what you should do. If you are planning to apply for a mortgage or take out an equity loan, get a copy of your credit report. In Canada, the 2 toll free numbers are Equifax (1-800-465-7166) and Trans Union (1-866-525-0262). Call them and get a copy of your credit report. (To apply for a Canadian mortgage, go to http://www.mortgage-loan.ca)

On the credit report you will see what is "dragging you down". You may think that you know what is causing you problems ie slow payment on your Visa card or a missed payment on your car lease, but there may be other information that is inaccurate.

Here are some examples. Perhaps you have paid off a loan or some other debt, but the credit grantor has inadvertently not reported the paid off account to the credit bureau. It appears on your report as an outstanding debt.

Or perhaps you missed some car lease payments and the leasing company has sent your file to collection. You discuss the misunderstanding with the leasing company and pay the missing payments to the leasing company. They promise to remove the black mark from the credit bureau. But when you look at the credit report, you still see the entry that the leasing company has sent your file to collection.

What can you do? Well, if the report shows that you are late paying your bills, the solution is easy. Immediately start paying your bills on time.

If there are some inaccuracies on the report, as mentioned above, you should get hold of the credit grantor, ie Visa or the leasing company, and tell them to contact Equifax and Trans Union and have the inaccurate entry removed. (Note: even though you know that the credit report is wrong, you cannot go to the credit bureau yourself and ask them to remove it. The removal process has to be done by the credit grantor).

Once you have the inaccurate entries removed, and also start paying your bills on time, your credit score will start improving.

Finally, how far in advance of applying for your mortgage should you get your credit report? I suggest 6 months to a year. I know that seems like a long time, but it takes time to 1) have wrongful items removed, 2) change your paying habits, and 3) allow your credit rating to start increasing.

Even though you have removed the inaccuracies and have started paying your bills on time, it takes months of "good" reporting to see the score rise. And it will rise.

The bottom line is: you should know what is on your credit report before the potential lender does, and secondly, you will get much better interest rates and terms if your credit score is in good shape. Good luck and don’t give up.

If you have bad credit, and want a Canada bad credit mortgage, go here.