It’s Not Just About the Score, part 4 or a series

In the first of this series, we noted that the credit bureaus collect and store your credit history, and that it is this information, when run through a sophisticated algorithm, that produces a composite score.

The score provides a general overview of your credit worthiness. But that simplified overview isn’t enough to satisfy the lenders. Even if your score is good, if you don’t meet certain other criteria, you may not be approved for a mortgage. The underlying information that yields that score is also examined.

Here are some of the underlying concerns the lenders will examine. Please note that we are discussing the requirements of “A lenders,” namely, the big banks, credit unions and financial institutions dedicated to mortgage financing. “B lenders” and “Hard money” lenders may have lesser standards, but will have higher rates and likely require higher down payments.

  1. The “Triple 2” Rule

There are three “2”s that the banks will look at. The first is that there are at least two credit lines. They want to see that there is more than one record of responsible credit history. A credit card (revolving credit) is the best test. If you have been responsible with a credit card, that’s a good indication that you can be responsible with a mortgage payment. But one line alone is pretty thin evidence, so a second line is required. It could be a second credit card, an installment account (like a car loan or student loan), a trade line (like a furniture loan), a previous mortgage, or even an open account (like a cell phone—but that will likely not satisfy the third of the three 2’s).

The second “2” is that the two trade lines must have been open for at least two years. That’s the minimum history to suggest responsible money management. So, if you hope to get a mortgage within the next three years, and have only one credit line, go and get a second one quickly.

The third “2” is that the two credit lines need to have limits of at least $2000 (in the case of revolving credit), or have had a high balance of at least that amount on a trade line or installment account. (This will rule out most cellular bills in satisfying the first “2”.) They do not need to have had the limit for two years but must have reached it by the time of mortgage qualification.

  1. Is there a bankruptcy on the record?

Contrary to what many people think, the simple fact of a bankruptcy will not prevent you from getting a mortgage, provided it has been discharged for at least two years. (Many think you have to wait seven, but this is not necessarily the case.)

While two years clear of a bankruptcy may qualify you, it will not necessarily do so. If there was real estate included in your bankruptcy, you may have to wait until that bankruptcy falls off your record (6 years after discharge). After all, you’ve already defaulted on one mortgage, why would they trust you with another?

Also, if you’ve had two bankruptcies, you will not be eligible even after seven years. A second bankruptcy remains on your record for 14 years, and you may not be eligible until it falls off your record.

Another effect that a bankruptcy may have is that some lenders may not accept credit lines established before the discharge of a bankruptcy (though this is not universal). It is possible to re-establish credit during bankruptcy, and this will give you a head start on growing your score, but not all lenders will count those towards your two required credit lines.

  1. Is there a Consumer Proposal on your record?

Banks treat Consumer Proposals almost like bankruptcies, and the same rules tend to apply. You may not be eligible for a mortgage until two years after a Consumer Proposal is fully paid off.

  1. Do you have unpaid Collections?

Collections severely damage your score, so that may, itself, keep you from getting a mortgage. But, even if your score is high enough despite a collection, you may be denied simply by the fact of having an outstanding collection.

Collections, however, fall off your report six years after the “date of last activity,” so if you are planning to get a mortgage in the future and your collection will no longer be on your record at that time, you may actually hurt yourself by partially paying the collection (because it will restart the six-year clock.)

  1. Have you been late with any payments?

You must be current with all your payments in order to be approved for a mortgage. You may be denied on the basis of a single late payment within the last year prior to applying for a mortgage. Take whatever steps are necessary (such as automatic payments) to ensure you never miss a payment when due. Richard Moxley, in his book The Nine Rules of Credit, gives more tips on this.

  1. Do you have a negative history with that particular lending institution?

No lender wants to be burned twice, but they may be less concerned if it was a different lender that got burned. This is one reason why it is good to use a mortgage broker to find you a mortgage.

  1. Do you owe back taxes?

It may or may not show on your credit report, but owing the federal government anything will disqualify you from getting a mortgage. You must pay off every dime you owe the government before you will get approved. (Amounts in official dispute with CRA, though, do not disqualify you, as they are not debts until the dispute is settled, usually in a tax court.)

Every legitimate rent 2 own program includes a credit coaching component. In our rent 2 own program, we help you navigate all these details, so that you will have a great score and report for the banks to see when it’s time to qualify.