Recently I had a client approach me for a mortgage. I first met her when I was filling my property with a Rent to Own strategy. At the time, she was looking in an area outside of where I am currently investing.
She recently approached me to request a mortgage as her income is good and her beacon score is decent. She is in the mid 600’s.
However, she had collections from the Ministry of Finance and a loan through a company, called Easy Financial that charges 42% annually. She also had previous collections that would not come off her bureau until for another 3 and 4 years respectively. With Easy Financial, she was making only the minimum payments and at that rate, it is simply too difficult to pay down and she was basically drowning!
We sat down and looked over her situation and I recommended that she pay more towards the Collections so that could be paid off as soon as possible. Keep in mind that from the very last payment on a collection, it will take another 7 years to come off of your credit bureau. That does not mean you won’t qualify but it will impact the interest rate and product you are eligible for.
Second, as she did not have any collateral (her vehicle was also leased and she did not have any property) I suggested that she should approach her bank and request a Line of Credit (even at prime + 3%) to replace the loan @42%. If you look at 6% vs. 42% your savings are huge!
Let’s do the math:
Loan amount $5600 @ 42%
-she was only paying $89/month, which is less than the minimum
Line of Credit
Loan amount $5600 @ 6% (Prime + 3% – basing this on higher limit)
But if she pays the same amount she was putting towards Easy Financial she
will be paid off in much less time.
My client was very disappointed that she could not qualify for a mortgage at
this time and could not understand that due to her outstanding collections
with the Ministry of Finance, that it was impacting her overall beacon as well
as her ability to qualify.
I explained to her that a NO now does not mean a NO forever. Of course if
she continues to pay only the minimum and does not decide to take the
advice to change to a lower interest option, she will face a NO forever!
The information I gave her was not accepted graciously but rather with hostility. As mortgage professionals, we are not always able to do what our
clients would like us to do. But by giving the proper advice to our clients and
guiding them on ways to fix their credit, pay down their debt and even take
steps to qualify for a mortgage – we are doing our best by our clients and at
least I can feel satisfied with that!
I did advise her to approach her bank as she already has a relationship with
them to see if they would consolidate her debts or even qualify her for an
unsecured line of credit. At least that way she could be paying around 6%
instead of 42% and working her way towards debt reduction and future
If you face a similar situation, reach out and get the right advice. Make sure you are not strangling yourself each month with high-interest credit cards or loans! Put that extra money in your pocket and not in the pockets of the
credit or loan providers!