Credit & Debt Planning

If I have to tell someone that their debt ratios are too high to qualify for a mortgage, I always offer a solution.   Restructure, Restructure, Restructure.   If that does not work we need more income, so maybe find a co-signer or more downpayment.    Then and only then if that does make the deal I say the words that every Calgary Mortgage Broker hates saying.  Maybe you need to find a lower priced home.  Here is some more information about those ratios and what effects them.

 

Credit Cards

What you should take from this is that credit cards are merely a method of redistributing spending power over time at the expense of interest costs and in a pursuit keeping up with the neighbors and thus increasing your standard of living. There is a shifting consumer mentality from how much it costs to how quickly it can be purchased. Instead of looking at IF the purchase can be made, you have to look at should the purchase be made, and CAN I AFFORD IT?

Separating wants and needs is something that no longer crosses the consumers mind. We highly recommend reducing your credit cards to just two, and using one card more than the other. This card should be of the lowest rate available to you should you carry a balance. The problem is that with available balances impulse spending is more likely. Always try to transfer to the lowest rate card you have, if you can't get your cards down to one right away.

Lines of Credit

In most cases these are secured by assets, and are very similar to overdraft protection. This revolving loan may be a fixed amount or a percentage of the outstanding balance. We recommend if you must use this for personal use to that you ensure the rates are competitive as most times they are prime based and much lower rates than your average credit card. Credit cards with higher rates are often best transferred to a line of credit if the rate is lower. The LOC if secured is often based on prime and is often a very low rate.

How much can you handle?

Based upon the above information you are in a (choose four options to fill in) All decisions on credit is not based on a single system rather a combination of a multitude of factors and referred to as 'The 5 C’s of Credit'.

Character

Capacity

Capital

Collateral

Conditions

We know that credit rating is used mostly to ascertain the rate at which the loan will be given but is generally not a trigger on whether to lend or not.

Character

Character is mostly reputation and history with the bank or lender. Credit History also plays a role in this. - Every consumer has the right to check their history and can be done via the mail for free twice per year. There are also a number of paid for websites offering this service.

Capacity

There are a number of ways to calculate your capacity. 

The 2 most common are Total Debt Service Ratio and Gross Debt Service Ratio.

Historically, lenders like to see a ratio under 0.40 for new loans.

Total Debt Service Ratio is a rough guide for the amount of debt the individual can afford.

This is calculated as monthly mortgage or rent plus property taxes heating and 50% of the condo fees plus debt payments divided by the gross family income.

Total Debt Service Ratio = (Total Housing Expense + Debt Payments) / Gross Monthly Income

Gross Debt Service is a rough guide to determine creditworthiness. This is calculated as monthly mortgage or rent plus property taxes heating and 50% of the condo fees divided by the gross family income.

Gross Debt Service Ratio = Monthly Housing Expense / Gross Monthly Income

Capital

Traded in financial markets. Its market value is not based on the historical accumulation of money invested but on the perception by the market of its expected revenues and of the risk entailed.

Collateral

Having any asset that can be used as security. For example a car, home, and land would be considered.

Conditions

The conditions of the loan, such as the interest rate and amount of principal, will influence the lender's desire to finance the borrower.

Understanding the above will help you understand where you are and the strength of your application and situation.  Knowing where you are before coming to a Calgary Mortgage broker is not required, as we can get you there that is for sure.