The Importance of Good Credit

There are a number of steps to getting mortgage financing. A particularly important step and one many people don’t give much thought to – is the credit check. As a routine part of the application process the lender will order a copy of your credit history.

ottawa-home03 Your personal credit history is compiled by credit bureaus which collect information from various sources including banks, retailers and other public records, creating a credit report. Information such as: what credit and debit cards you have, the types of accounts you have at various financial institutions, information about personal loans, mortgages, student loans, etc., is all part of the report. The report shows the creditors’ names, account numbers, the date accounts were started, the current balance as well as a detailed payment history (for example: how many times you were over 30, 60, or 90 days late in paying bills). Generally, credit reports show information going back six to seven years. The report will also show public information, for example, marriages, divorces, liens, judgments that have been entered against you, bankruptcies, etc.

The credit bureau does not rate you – it merely provides information on your credit history. The lender will examine the credit report to aid in determining whether to lend you money. If the lender has any concerns about something on the report the lender may ask you for an explanation. Though lenders usually work as quickly as possible in processing mortgage applications – the process can be slowed down if the lender needs to go back to the applicant for an explanation concerning items on a credit history. So, don’t worry, but be prepared to answer questions the lender may have – often a simple explanation will do.

The lender will also use the report to verify other information on your mortgage application, for example: information about your employment status, your address (including the name of your landlord and perhaps rental payment history), etc. The credit report will also indicate inquiries made by other creditors over the period of the report. This information might be useful to a lender to show what other avenues of financing you might have tried and it may raise questions about why another potential creditor declined to lend it to you.

Honesty is the best policy – and that certainly holds true when applying for a mortgage. If you think there might be any credit problems – tell the lender up front and ask about the lender’s policy prior to applying for the mortgage. There is no point in trying to hide something that will show up in your credit history. Of course, even if you think your credit record is fine, there may be detrimental comments on the report about which the lender may ask you.

Just like the old saying – a stitch in time saves nine – by getting a copy of your credit report before you apply for a mortgage you may be able to avoid surprises and possible delays that may occur in having to answer questions about your credit report. Because the report contains information about you, you have a right to inspect a copy of it. Equifax, one of Canada’s largest credit bureaus, will mail consumers a free copy of their personal credit file upon request. The request must be by mail or via fax, and certain information must be supplied with the request. For more information, call Equifax at 1-800-465-7166.

If you disagree with something in your credit history you have the right to challenge it and ask that the information be corrected. For example, perhaps the report shows that you were over 90 days late paying a bill but the report does not indicate that you withheld payment pending a settlement of a dispute with the creditor. OR perhaps you were late with a particular payment because you were away. Whatever the explanation, contact the credit bureau to attempt to clarify the matter and have the file corrected. Equifax, for example, ensures that file correction procedures to personal credit files are made within seven days, and they send amended copies of your history to any company that has received your credit report in recent months.

Mortgage Application Checklist

All lenders differ on what they need from their borrowers. This list is intended to give you a general idea of what will be required at the time of mortgage application. Please check with your lender for a complete list of necessary information.

Social Insurance Number and Birth Date – Required of you and any co-borrowers
Paycheque – Your most recent pay stub showing year-to-date earnings
T4 Tax Forms – The lender will require 2 years T-4’s and accompanying tax forms
Employers – The names, addresses, and telephone numbers of your employers for the past two years
Accounts – You will need the account numbers and current balances of your chequing account, savings account, money market account or any other accounts you may have
Current Assets – Current assets such as RRSP’s, stocks, bonds or securities. Your lender may require a current brokerage statement with name of the stock, amount per share and number of shares owned.
Personal Property – Value of personal property including life insurance face value, employee retirement accounts, furniture, cars, jewelry, coins, and other valuable property
Liabilities – For each loan, provide the lender with the name and address of each creditor and include both the monthly payment and total amount due. Liabilities will include car loans, student loans, credit cards and other installment debt.
Current and Previous Addresses – If you own a home you will need the property address, current market value, mortgage lender name, account number, current monthly mortgage payment and outstanding balance. If you rent, you will need the property address, name and address of the landlord, the current monthly rent, and previous address/landlord. You will need information about your former addresses if you’ve lived in your current address for less that two years.
Sales Contract – Bring along a signed copy of that agreement and any amendments to it, a copy of the listing form for the property you wish to purchase and the legal description of the property.

Special Situations

Self employed or commissioned – bring Income tax forms for the past two years along with a current year-to-date profit and loss statement
Separated or divorced – Bring a copy of your divorce decree and separation agreement. If you are receiving alimony or child support and you want it to be considered as income, you’ll need proof of this income (cancelled cheques for the past 12 months, for example).

Closing Expenses

Once you have decided on a property, you need to be aware that purchasing involves both one-time costs and monthly expenses.

The largest one-time cost is the down payment.

It usually represents between 5 to 25% of the total price of the property.

Closing Costs, incurred by the buyer, are necessary to complete the purchase, but are outside of the purchase price for the property. Fees, types of services provided, and procedures required in the closing process will vary. However, the following list is provided for illustration purposes and is not exhaustive in nature.

Estimated Cost worksheet

Mortgage expenses including interest on assumed mortgages, if applicable, calculated as part of the adjustments), any arranging costs, and registration of a new mortgage in the Land Titles office, etc.
House insurance for fire and other hazards, typically including liability coverage.
Legal Fees and disbursements
Property Inspection (highly recommended)
Title search and registration of appropriate documents in the Land Titles office.
Cost of a Property Survey (if the seller does not have one on hand), zoning memorandum, tax certificate, and other related matters based on provincial requirements.
GST: Most purchases of resale home do NOT require the payment of GST; however, confirmation of this fact should always be obtained. As a guideline, GST is payable on properties other than resale residential property, subject to certain exceptions. For example, most purchases of NEW housing require the payment of GST on the purchase price, although a partial rebate is available. GST is also payable on lawyer’s fees and most disbursements.
Land Transfer Tax*
Personal Expenses, e.g., moving costs and purchase of household goods
Adjustments for Fuel, Taxes, etc.
Mortgage Insurance (and application fee, if applicable)
Home and Property Insurance
Connection charges for utilities such as gas, water and hydro

TOTAL

*Calculation for Ontario Land Transfer Tax
Up to $55,000 = 0.5% of total property value
From $55,000 to $250,000 = 1% of total property value
From $250,000 to $400,000 = 1.5% of total property value
From $400,000 up = 2% of total property value