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Mortgage Solutions for the every day Canadian mortgage consumer. Are you thinking about becoming a mortgage broker learn first hand what you should look for in a brokerage and what you need to be successful.
Len 00:02
Welcome. My name is Len Lane, and I am the founder and president of Brokers for Life Inc, and we are Dominion Lending Centers in Western Canada. The topic of our podcast will be about what we consider to be Real Life Mortgage Solutions.
Len 00:19
Welcome back. We are here again today to talk with Sandra Landry, and today we're going to talk about your credit. Now, we kind of talked about your credit last time, but now we're going to talk about 5c’s of credit and what it is that you can expect to see on your credit reports. Both of those are topics that probably don't get talked about enough in high school, when they should really start teaching people about this. But today, Sandra, welcome back to session two.
Sandra 00:48
Thanks so much for having me. It's great being back.
Len 00:51
Let's just dive right in. I guess the 5c’s of credits like character, capacity, capital, collateral and condition are something that lenders look at, and as well as your credit bureau looks at, I guess, to determine what your beacon score will actually be. So maybe run us through some of those.
Sandra 01:09
Yeah, absolutely. And you're right, it does eventually flow into your credit score. So really critical for people that are trying to build. So the character, really this is your lender trying to determine creditworthiness. They want to know who people are. What is this person like that they're going to lend some money to and they're going to look at credit history with that one. They'll look at late payments. They'll look at hits that are on there from lenders, so somebody that has a whole bunch of hits from potential new lenders might raise a red flag for a lender, because they go, me, is this person panicking trying to borrow a whole bunch more money? Is something going wrong? Why are there so many people looking at this person's credit on there? They're also going to look at this person's employment history. That's part of somebody's character, what do they do for a living? How long have they been there? Do they jump around a lot? You know, if things don't go well, the lender wants to know, am I going to be able to find this person in order to actually collect and if they move around a lot, that can be harder.
Len 02:19
And strangely enough, part of our application process is what we call the threes, right? Three years of employment, three years of addresses. They want to know where you've lived as well. You know, those are key parts of the basic application on our side.
Sandra 02:35
Yeah and that completely makes a lot of sense, right? It's your lenders trying to get to know who you are based on paper only, and that is very difficult. So that's why they ask these kind of questions. I think the next one that would make sense is cash flow. When we're looking at cash flow or capacity, what's somebody's income look like? And, of course, that really comes down to, if the lender lends somebody money, are they going to be able to repay it? They'll consider that employment history. As far as if this person is employed long term, they're more likely to be able to make those payments than somebody who is on short contract work, are self-employed individuals, as I'm sure, you know, see a lot of pushback from lenders, because self-employed individuals really struggle to have consistent income. And then, of course, there's always the tax issues that can come with being self-employed, if somebody's not not cautious.
Len 03:37
And/or not wanting to pay taxes when you're self-employed seems to be the other issue, right? They probably have cash flow. And strangely enough, most of them fall into our B lender category, because they'll look at 12 months of their actual cash flow, as opposed to what everybody else is kind of stuck with. What did they report on the T1 generals? What did they show on their NOAs? Right? So it makes it a lot harder to get a regular mortgage for self-employed these days.
Sandra 04:05
Yeah, and I expect you have this conversation with a lot of folks. It's, you know, they want to not have a lot of income when they file their tax returns because they're going to have a higher tax bill. But when it comes to borrowing, that doesn't help. So they really want it to show both ways, depending on who happens to be looking at it. And that's very difficult for someone who's self-employed to make sure that they've got it appropriate.
Len 04:34
And it's kind of what the government has said to them, if you don't want to claim taxes, then you've got to go to another source of money for a mortgage in this market anyway, right?
Sandra 04:44
Yeah, absolutely. I think the next big one here would be collateral. So this is our assets. This is whether or not somebody actually has an ability to back those loans. Are they going to be able to repay the loans with any collateral? This is usually real estate. As the big ones that we'll see that lender might want to take an interest on on a property, but it can be vehicles or investments. We'll see that periodically, or even business assets like accounts receivable. We'll see that sometimes as well, building up equity in assets is good because it shows the lender that at some point in time you've been able to pay, you've paid regularly, you've had no problems, you still have the asset, which means nothing has been seized. So it does give the lender a little bit of comfort that there's something here. And worst-case scenario, they know that if it doesn't go well, they'll have an asset that they can collect on and and pay the loan off with.
Len 05:50
Right, and sometimes we, of course, oilfield country, we see lots of pickups and stuff like that, which at one point we're depreciating assets. But not these days, but it's, it's always interesting to see what people consider to be assets. You know, a 10-year-old truck is, well, maybe a bad example. A 10-year-old car in Alberta, you know, is worth three or $4,000, right? So it's, everybody always bumps that number up to 10 or so. And I'm going like that, not in this market anyway, right? So, assets, of course, they would also look for any savings or RRSPs, or I see people put in insurance as an asset all the time, and I always have to tell them that the only time that insurance is an asset is when you die, and it's someone else's asset at that point, right? So, fear is to watch that.
Sandra 06:41
Yeah, that's right, and that's a good point, cash and RRSPs and all of those things. Yeah, they count.
Len 06:50
So what would be the conditions? That's the fifth C that shows up all the time. I don't quite understand that one.
Sandra 06:56
Yeah, I think of conditions as kind of the the other factors section. This is the other than the borrower's financial state. So this will be the bigger stuff. It's the economy. It's how is the economy currently operating in that particular person’s city, province, country, depending on what the loan is for, these outside factors can really impact whether or not somebody has an ability to repay a loan. Even new government policy changes can impact entire industries. We see that, of course, here in Alberta, you know, a change in policy changes the way people will come into a province and invest in a province, what your loan is for can be heavily impacted by some of these factors. You know, as I was sitting here making notes, I got thinking about, well, if I went to the bank today and I said, I want to have a factory, and I want to produce DVD players, the bank is probably not going to be inclined to give me a loan, right? In today's world, it is not likely that I'm going to sell a lot of DVD players. So it's all of these outside factors that are going to impact somebody's ability to repay that loan. And so the conditions is all of the stuff that is not just what we hold as individuals.
Len 08:26
If the person at the bank was young enough, they would probably have to ask you what a DVD player was.
Sandra 08:31
Yeah, exactly.
Len 08:34
Yeah. So all of those factors, of course, go into what begins to show up on our credit bureaus. Maybe, I think the simplest way to kind of review that might be to just walk through 0 to R1 or to R9 I guess, right, and what shows up in there. So, kind of maybe walk the audience through starting at R1, I guess, which is a good place to start. I guess.
Sandra 09:00
Sure. I think before we go forward, I want to make sure that people understand that there's more than one reporting bureau. There is Equifax, and there's TransUnion that exist here in Canada, and those lenders don't all show the same thing in the same places, and so I think sometimes that surprises people. They would assume that every lender would report to both of those bureaus. But that's not always the case. So sometimes you'll have a different credit rating and you'll have different accounts on each one of those. Basically the way that they work is every account that you have that's reporting that the lender has sent it, it's going to have a letter and a number attached to it. The letter will indicate what type of a borrowing it is. So there's R, and that was going to be your revolving stuff. That will be your credit cards, your lines of credit, the things that just continue, and they don't have a start and end date, generally. You'll have an I, that's your installment products. Those will be your car loans, things that are done at some point in time. And you'll have, O, which is open. You'll usually see that for something like an overdraft. So every account will have one of those letters, but then it will have the numbers that attach to it, and it's zero to nine. Zero means there's not enough information there to say anything about it. It's usually when it's very new. One is everybody's happy you're paying it on time, you're paying it well, there's no concerns. There's not been any late payments. You know, on the other end of the spectrum is going to be your nine. That's where anything that's been sitting in collections will fit. It will hit pretty hard on your credit report. It'll show as a nine. Your bankruptcies will also show there in a nine, your consumer proposals, or your orderly payment of debt, those types of things, those are going to show as a seven, and then kind of all of the numbers in between are something has been on your credit report that isn't ideal, that's bringing you into those higher numbers. But ultimately, our goal is to always have everything that sits there as a one. One is everybody's happy. Best reporting that you can get.
Len 11:23
For the record, there is no six. Did you know that? I never I didn't know that–
Sandra 11:27
There is no six?
Len 11:30
There is no six. I asked Equifax why there was no six, and they said, Oh, we're saving that for something. They don't know what they're saving it for, but there is no R6.
Sandra 11:38
That's right, you know, I have that list on the front of one of my books. I don't think it really occurred to me that six wasn't there.
Len 11:46
Six wasn't there, right? So, yeah. So, we talked about bankruptcy last time. So how does that show on the credit bureau?
Sandra 11:56
Yeah, so bankruptcy, it'll sit there as the nine, which means it's going to be dragging down that credit score ultimately. But you'll also have, you know, foreclosures that will show up on there, and a foreclosure will show that it exists. Lenders, of course, don't want to see that on there at all. Bankruptcies, proposals, they eventually, they do fall off the credit bureaus with somebody who's never been bankrupt before, that's going to sit on there for six years after the date they complete that bankruptcy. So, in theory, if somebody is low income, no assets, they're going to probably be a nine-month bankruptcy, and it's going to sit there during that bankruptcy that nine months, and then they get their discharge, and then their six-year timeline starts. But if somebody has a higher income, they're in bankruptcy longer. So it will extend that period of time on there. Somebody who's been bankrupt before, though that's where we really see it impacting. So, you're going to have 12 years after the date that bankruptcy is done. So, if somebody is bankrupt a second time, they have a higher income, so they could be a 36-month bankruptcy. And then you tack on another six years on top of that. It is a very significant amount of time that it will show up on there. It basically revives that first six-year period and then starts the next six-year period, so 12 years on top of there.
Len 13:22
So, I'll just mention something on foreclosures before I forget. It's like so a foreclosure with CMHC involved. We've seen it over the years, with people not realizing that once you've got bankrupt and CMHC is involved, and they lose money or have to pay, the chance of getting a CMHC-insured loan, or agent or Canada Guarantee Loan Mortgage again, right? Is pretty much zero because they are the elephant in the room. Doesn't matter how many years later they have that always earmarked on their books, right? So.
Sandra 13:58
Yeah, that is exactly it, they have a longer memory than perhaps Equifax and TransUnion do. And we've certainly said that to debtors that come into our office and we say, you know, if you can avoid a foreclosure, that's kind of ideal, unless you think this is it, you're not going to be owning property again. Bankruptcy seems like it's going to be worst-case scenario, and nothing can be worse than that. But if you want to have a mortgage in the future, bankruptcy actually is not quite as bad as a foreclosure sometimes. And so you're right. That's really important for people to know.
Len 14:35
Yeah, it's a fact that gets missed, and we've come across it dozens of times, probably over the years, right? So, it is something that doesn't get forgiven, unlike the loan itself, the mortgage, nobody wants to see a bankruptcy or a foreclosure on any at any stage, whether it's, you know, in bankruptcy or whatever, so. So, you talked about the two credit unions too. An interesting fact for us on this side is we do 100% Equifax ourselves. We have the option for TransUnion, but there's only two or three lenders that actually use it up front, but there's a lot of the lenders that will pull TransUnion after the fact on their own end. So we sometimes get those little surprises that come back, like you said, not everybody's reporting to Equifax. And, you know, every now and then, you'll see something, but somebody asked, Well, what about this other $50,000 loan over here shows up on TransUnion, and that's, you know, it's back and forth between the banks. Royal Bank seems to use TransUnion a lot. Majority seem to be on Equifax, but every now and then, we'll find them over there on TransUnion. So.
Sandra 15:46
I don't know; I'm not sure what the fees are or the requirements are on on lender side, on what the requirement is in order to report on either of those bureaus. So yeah, it could be something as simple as the contract has ended, and now they're going to try the other one and see what that looks like. So it is the onus is on people to make sure that they're checking both of those reports if they are not sure who they owe money to. And that does happen, people forget.
Len 16:18
Can I assume on your side that you take a look for both, is that?
Sandra 16:23
We periodically will pull credit reports. When we're doing an insolvency, generally, we tell people to pull their own and then just send us the report. Because generally, people can get their own report for free. They should be able to do that once a year, as I'm sure you know. So we just say, Go and fully report both to make sure you're not missing anything. In case you've forgotten anything. It's just easier that way to make sure that we haven't missed anything that's really critical,
Len 16:55
Right? Yeah, and it's funny, because we didn't use TransUnion only because not enough lenders were using it, but then the fee that they wanted from us was quite astronomical, actually, compared to what we pay for Equifax, which is still about a $2,000 plus a bill a month. But it's, you know, it's something that not enough people are accepting it on the other end. It made no sense on our end, right? So, repossessions, and we see them occasionally. How do they report on the bureau?
Sandra 17:27
You mean for a foreclosure?
Len 17:31
No, on a vehicle or something like that, repossessions seem to have a different kind of category, depending on the issue or, I guess, of the loan.
Sandra 17:40
They do, but for the life of me, I cannot remember what the section is because you're going to have this section where all of your counts show up, but then at the end, there are some separate sections that show up there. I don't remember the terms of what they're called, but that's also where your foreclosure shows up. Repossessions kind of show up in that separate section as well.
Len 18:03
Right, so that would be like collections itself at the bottom of the report? So the other thing we always have to educate our clients on this side is, if you have a collection, don't bother phone and the person that you had it from, whether it's Telus or whomever, right? Because it's now the collection company that owns that debt, right, because they buy it pennies on the dollar.
Sandra 18:26
You're right, and to try and go back to the original lender, they have no idea what you're talking about, and if they do, they're not going to spend any time answering questions. They will simply say that's gone, and debt can be sold multiple times to various collection companies. I don't know what your experience is, but I know for us, we certainly hear the stories, and some of them are quite aggressive. They will be able to collect a lot, and then they will do what they can, and they think everything is fine, and all of a sudden, the calls stop, but suddenly the debt's been sold, and there's another collection company, and then they'll try and collect so, right? This is how they make money. So.
Len 19:10
Yeah, it's an interesting part of the industries, right? People don't realize how much debt gets bought and sold every day for dimes on the dollar sort of thing, if not less in some cases. But we've seen that more than once, where it's, it was at one, but now it shows up twice, or it's coming up the end of its six-year term on the credit bureau, and it still hasn't been paid, but they will reactivate it, right? So it never really comes off of the credit bureaus. And in some cases, anyway.
Sandra 19:38
Yeah, you're right, and that is true. Once the debt gets sold, Equifax and TransUnion, they're not going to know what that is. They just know now there's a new person reporting something, and it's brand new.
Len 19:52
So, we have where we have had some success in helping clients, is that we'll get them to the right person to pay out the debt to the collection agency, right? Because it does show up on their credit bureau. So get them there, get them to pay it, get a receipt for it, and then make sure that you open up an Equifax account and make sure that they get a copy of it. Don't rely on the credit persons to actually report that to Equifax for you, right? So just, we just had one where we did it seven to ten days. So we thought that was a pretty decent turnaround to help them, A. increase their credit score and get that off of their collection or after.
Sandra 20:34
That’s pretty quick; you know what that's a really good point is, a lot of folks don't realize that the credit reports belong to the individual, and so that means that if there's something that needs to be updated and it's not getting updated or it's wrong, we can change that, right? We can reach out, we can file reports or complaints or whatever it is, and say, Hey, this isn't correct. I need it corrected. Do you see that a lot in your practice?
Len 21:06
It's, maybe it's not a lot, but it is something that we have used as a tool over the years to, you know that 590 score that doesn't quite qualify in the regular mortgage world, you know, bring them up 30 points easily, you know, so that they can be on the deal, at least, or something along that line. So, yeah.
Sandra 21:23
Yeah. I was taking a look at the Equifax website. I was curious if they had anything on how the credit scores are developed. And I thought it was interesting they actually post weightings on how the weightings work for developing the credit score. So payment history is number one weighting, which isn't super surprising. I expect that's 35% of the weighting of a credit score. So being late once on your phone bill or whatever it is, can actually have a fair bit of impact on your credit score with that, because you're dropping from a one to a two or a three, whatever that is, and then the used versus unused credit shows up as 30% of the weighting, which is also a very sizable number. Credit history, which is the length of an account holding it, shows up as 15% weighting. Public records, which I think is that section we talked about. That's where the collection and the bankruptcy shows up. That's a 10% weighting. And then, of course, inquiries, is 10% so these will be the hard inquiries.
Len 22:40
Yeah. So like, when you're shopping for cars, and they they check your credit seven times in two weeks? Yes.
Sandra 22:47
Oh, I have seen that, actually.
Len 22:49
I’ve seen that a lot, actually. And it's like people don't realize, what the craziest one I see, though, is somebody who has brand new credit, 12 months, brand new credit, 800 plus credit score. And for the record, credit scores run from 300 to 900. I don't I've never seen a 300, I've seen some high, very low four hundred. My wife has a 900 because everything's in my name. But it's, you know, it's interesting to see how fast someone can have a credit score of 800 just because they haven't had a chance to get bad credit, to make a mistake or do something like that, right? So.
Sandra 23:27
Yeah, absolutely. So yeah, having one phone bill, as long as you're not late on it, you'll build that credit score.
Len 23:38
Yeah, exactly. So, yeah, okay, so that's lots of good information. I think for the audience, they pulling this one up right behind bankruptcy to say, Okay, you should have been doing this instead. It will make a good back-to-back series for us. So once again, I'm happy that you can take the time out of your day. I know you're a busy person, so it's always good to get some information from a source that's not me.
Sandra 24:06
I do have, obviously, counselling, financial counselling as part of our files. And if I have two more minutes of your ear, I'd be happy to just share a few pieces of those tidbits of how people can rebuild credit. I expect it'll be building on what you talked about in your last but I'd be happy to just throw out a few that we generally talk about. So one thing is keeping credit longer, flipping back and forth between a number of credit cards and constantly applying for new cards can be credit cards particularly, can be really detrimental for folks. So having a credit card and keeping it longer term is really important because they want to see really long-term history. If you can keep it and you can keep it paid for a long period of time, but that also means that you need to do work upfront as far as what kind of a credit card you want. It's easy to get a credit card, but it's not easy to get the credit card that you're looking for. So I would say, keep that in mind. Find the credit card that's right for you, and don't just keep flipping. You want to keep your borrowed amount low versus the available credit. I usually say 50%, but there are some folks that will say 30%. So you should never keep a balance more than 50 or whatever that number is on that debt, on that available credit for a long period of time. The reason for that is it suggests to the lenders that you can't get your debt paid off. So, always having it maxed out is not ideal. You want to be able to get it paid off or not use it in full all of the time. Never pay it late. I don't think that's a real surprise to anybody. Paying late once you're already starting to impact that credit because we talked about that, the payment history is 35% of that credit score, it's going to have huge impacts. Set up automatic payments. I do that for myself. We get busy, and it is really easy to forget it. If your credit card bill or your phone bill is due on the 20th, you don't need to do it on the 20th. You can pay it on the 15th because that's when you get paid. Or you can split it up into two payments and start paying it ahead. Just have it automatically set up, we all have that ability in our bank account, so that really helps.
Len 26:41
Yeah, I see phone bills a lot of times, right? There seem to be the worst culprit that if you have a credit card, just pay it on, make that payment through there and pay it off. You know, monthly through there. It seems to be, I've had clients who are quite intelligent, high level education, but thinking they only had to make a payment every quarter didn't work for their credit bureau very well.
Sandra 27:06
Yeah, because they look at it, they go, Oh, it's not a big deal. I always pay it off. I just get busy. My credit bureaus don't really care if we're busy, yeah, that's right, it just looks like you can't pay it off because we don't know what your circumstances are.
Len 27:20
That's right. They don't care what you do for a living.
Sandra 27:22
They do not care what you do for a living. And so I always say, just set it up automatically. Just you don't have to think about it. And then the other piece is you have to use the credit you can't get a credit card, and then never use it, because then the lender is never reporting anything, and if the lender doesn't report, it doesn't mean anything.
Len 27:40
And you know, the other one to watch when you're talking about credit cards that just had to happen to one of my clients that was 800 beacons all their lives, right? And what they had done was a card he had never actually used it, but there was still a yearly fee that got charged. So not paying any attention. It was like our three or four already, right? And it did tank his core into this well into the low 600, actually, in a very short period of time, which is ridiculous when you think about it.
Sandra 28:09
It is, and you're right. And that goes back to my first comment. Make sure that the credit card you get is the right one for you. And if you don't need it, and you have to pay a fee every year. It's probably not the right card. Maybe do something else, cancel it or use it. But even you know, $40 of groceries once a month, you're gonna pay it off right away. You don't have to use it all the time, but use it once. Have a report every month. It makes it look great. And then, of course, argue those errors. We talked about the fact that Credit Bureau reports are ours. So if you see mistakes, you need to reach out and make sure that those get repaired.
Len 28:57
Right. And it's good to have I pay a little bit to Equifax just to make sure that nothing's weird going on with my accounts or anything like that, as well, that that's been had that in place for a long time. It just makes sense that they're kind of watching for me as, A. for fraud. And you know, if there's a weird payment or something goes through there, they pick up the phone, and they call me, right? So.
Sandra 29:22
Yeah, it gives a lot of comfort with something like that.
Len 29:25
Well, yeah, and I don't think it's a free service. I can't remember when I got it, but it's been there, you know, it's like a couple, maybe 20 bucks, you know, every month, or something like that. But you could be in a lot worse shape very quickly if there's no alerts coming to you. So, yeah.
Sandra 29:39
Yeah, agreed. Yeah.
Len 29:43
Good. All right. Well, again, thank you for your time, and it's always good to get this information out to the right people. And the podcast is growing on a regular basis, so, like, been a couple of 100 subscribers already. So it's, it's coming along quite nicely and because of information, and of course, being able to talk to people like yourself. Sandra, it's great again to have you on the podcast, so.
Sandra 30:10
Thanks again. I really appreciate you having me. You take care.
Len 30:14
Thanks for listening today. I hope you found the information that we provided to be useful in your mortgage journey. And remember, you can always find our associates at www.brokersforlife.ca/associates. Have a great day.