STEPS TO YOUR CREDIT REPAIR
Whether you have been Bankrupt, in a Credit Proposal, Under Collection, have Unpaid Judgments, or simply no credit at all, you can still buy a house. Get someone to buy the house for you. Simple easy and bam you are getting a house. But do not forget to tell them why you need them to buy the house for you. It is that easy. But do you know someone willing and having the financial capability to buy you a house?
Sometimes bad things happen to good people and because of circumstances or lack of knowledge you get yourself stuck up the proverbial creek. Okay, let us be realistic, You have to do some work first. You have to establish a positive net worth. You have to come up with some down payment monies and the closing costs and need an action plan. Well that is what this article is about, we will cover several topics but my goal is to help you get your credit back so I can help you realize your dream.
My job is mortgage brokering, and that means helping you get the financing you need to make that purchase. It also means teaching you about credit, how it works, and why or why not you are paying a certain amount of interest for the privilege of borrowing money from the lender.mOkay your journey is about to begin.
STEPS TO RE-ESTABLISH YOUR CREDIT
A little introduction to the world of credit, there are two types of credit typically reported to the credit reporting agencies. Instalment (1) and Revolving (R) credit. You will likely have heard someone say I have really good credit I have all R-1’s or the reverse my credit is poor I have several R-9’s. What we are working towards here is re-establishing your credit and having all R-1’s for your credit cards and I-1’s for your loans and leases.
Revolving credit is best described by a credit card, you have a limit and it can go up and down. Every month you have to pay a minimum of the balance, typically from 1% to 3% sometimes more of the outstanding balance.
Instalment credit is best described by a loan, where you borrow a specific amount of monies and you pay back the same amount every month for a specified term. The balance of the loan is always going down and you can’t typically access the amount paid off unless you renegotiate the loan and start over again. So what you need to do is establish three trade lines.
If you wish to see your credit file, go to www.equifax.ca or www.transunion.ca. To obtain an on line report you will need a credit card or a friend’s card.
The first and easiest (well you have to have some cash saved, so you better start that right away) method to getting on the road to recovery is the secured credit card. The Peoples Trust Master Card
If you are bankrupt you will have to wait until discharge. After your bankruptcy is COMPLETED and you have received your DISCHARGE, you don’t have the burden of credit card, loans, etc., so saving money is going to be a lot easier with those monkeys off your back.
Start a forced savings account, or payroll deduction to buy Canada Savings Bonds or automatic deposits into a savings account or by putting money into a separate account that you don’t have access to on your debit card or online banking. Make a trip every payday to the bank and transfer money over to that account. Remember you are saving for a house, so be realistic do not put $20.00 every two weeks put at least $200.00 every two weeks, you need to really commit yourself to this initiative.
Another important factor in establishing credit is to use the credit card, but we also do not want you to run up the debt. A simple way to do this is get an extra envelope, have it handy in the car and every time you purchase gas for your car, use the credit card but put the cash IMMEDIATELY in that envelope. Once you receive the monthly statement you have all the cash ready to pay it off in FULL. It will be reported to the credit-reporting agency that you used the card but that you also make your monthly payments, on time. This is the first important step in re-building your credit.
In addition to this secured credit card, once you have had it for several months, you will be able to obtain what commonly is referred to as a point of sale credit card. Hudson’s Bay, Sears and Esso are examples. If you were at Hudson’s Bay and you are making a purchase they will ask if you want to apply for one of their credit cards and get 10% discount on the purchase. You will in almost all cases automatically be approved when you produce another credit card. The minimum limit will be $300.00 and quite possibly up to similar limit on the credit card you already have.
This gives you another credit card for your credit score. This helps confirm your ability to use Revolving Credit. Use it for essential items but always follow the same procedure as gas purchases, put the money in an envelope.
It’s also beneficial to maintain a small running balance. This helps your Beacon Scoring. But remember always make at least your minimum monthly payment, no matter how small. You are using these cards to re-establish credit and if it costs you a little interest, then that’s the price.
The next step to re-establishing your credit rating is a loan. An RRSP loan is a good debt instrument to help you save for a down payment if you qualify as a first time home buyer, the RRSP can be used towards the down payment or alternatively it helps you establish net worth. Select lenders provide automatic RRSP loans without much difficulty even though you have bad, poor or no credit or even previous bankrupt.
This is one of the best ways to establish Instalment Credit if you have no credit at all.
OPTIONAL THIRD STEP
Car Leasing and Auto Financing. There are several leasing and finance companies that specialize in bruised credit financing for vehicles. They charge a higher rate of interest than the banks, but less than some finance companies. The important part to this is to make sure that the company is big enough that it reports all of your activity to the credit bureau. In some cases the lender is a local company or the car dealership itself and they only report you have a loan with them but they do not report monthly activity. Check to ensure you are getting monthly reporting, it helps build the credit score and that is what we are after. It is best for these trade lines to be open and functional for at least one year.
AFTER BANKRUPTCY, WHAT ARE THE COMMON STATED GUIDELINES FOR BUYING A HOUSE?
- You must be discharged, two full years.
- You must have re-established credit both revolving (like a credit card and Instalment (like a loan with regular payments or a car lease).
- You must have a minimum of 10% down payment plus 1.5% the purchase price for closing costs.
- You will likely pay the posted interest rate and not get any discounted rates.
These are the general guidelines from Canada Mortgage and Housing Corporation.Beacon Scoring also qualify for time on the job, net worth and debt servicing.
There are several alternative money sources or what we call sub-prime lenders that charge a higher albeit reasonable interest rate that will allow you to purchase a home but they likely will want at the VERY minimum 15% down payment but you can be discharged as little as 1 day but they prefer a minimum of 6 months.
There are two types of lenders out there; you can buy a home very shortly after discharge as long as you fit their criteria, lots of down payment monies and substantially higher rate of interest or follow the plan! And get preferred interest rates. The less the time from discharge the greater the amount of the down payment
If you do not want to have any hassle you would need a 25% down payment, but you say if I had 25% down payment I would not have gone bankrupt. There are cases where you are discharged and you come into funds, this is where it applies.
In the case of just bad credit, paid judgments, or collections some alternative lenders will require proof of payment of the above mentioned and at least 10 to 15% down payment, again this would be like an alternative lender. Some lenders may disregard bad credit after 3 to 4 years but that bad credit has to be paid in full.
Also there are a few lenders that will NOT deal with a previous bankrupt at all until the bankruptcy has fallen completely off the credit bureau, and that takes 6 years from the time of discharge.
Remember if you are a double bankrupt in Ontario it takes 10 years to come off from the time of discharge and it is very unlikely any lender will deal with you and they will require a minimum of 25% down payment to purchase a home.
Refinancing is easier than making a purchase, most alternative lenders will consider you once you are discharged but they will restrict the amount they lend to you in the neighborhood of 75 to 85% loan to value in the first two years. After that they may lend up to 100% the value of the home, AS LONG AS ALL MONTHLY MORTGAGE PAYMENTS WERE MADE DURING YOUR FINANCIALLY TROUBLING TIME.
In both cases of purchasing and refinancing it is VERY important that you keep your credit clean. Do not have another collection, judgment, or allow a credit card to fall even one month behind. This will seriously hamper your ability to get the financing you need. Keep it very clean, make your payments, save a down payment, this will get you into that home of your dreams. All is not lost, but there is work and personal commitment involved.
Courtesy – CIR Mortgage Corp.