Qualifying with Damaged Credit 

Are you ready to buy a property but your credit rating is less than stellar? Don't despair; there are mortgage products that could be your ticket to realizing the dream of home ownership

The term 'non-conforming market' is used to describe people outside the credit norm; people who, for whatever reason, can't get a mortgage through the most prevalent channels. This includes people who are self-employed, new to Canada or have a blip on their credit history.

How it works

'Sub-prime' refers to the risk associated with a borrower, not to the mortgage interest rate. Typically, these mortgages are offered at interest rates above prime to customers with below-average credit ratings or who can't prove income, eg the self-employed.

The rate is determined by a system of 'risk-based pricing' and, according to Laura Forester of GE Money, every lender has a slightly different way of determining risk. "We do it based on three key criteria: credit score, LTV and documentation to support income," she says. Forester adds that the rate you pay will go up depending on the risk matrix, although there is an upper limit.

"For a private mortgage you can expect up to 5% higher, and even institutionally as well," says Della Dwyer of Invis. "Also, the sub-prime lenders aren't offering the higher ratio mortgages they used to, so everything has tightened up. It's a shame, because we don't lend like the US but we're being painted with the same brush."

The 'S' word

It's important to differentiate between the sub-prime situation in the US and the sub-prime market here at home.

"It's a very different animal here," says Janet Martin, CEO of PMI Canada. "We didn't get into the type of lending in Canada where you have multiple layers of risk and where you're lending to people who have no chance of achieving sustainable home ownership."

According to Jim Rawson, regional manager for Invis, Canadians didn't really buy into the same sub-prime
market that the US did. Although the sub-prime market here is under some pressure right now, with many of the lenders who used to offer this kind of product closing doors or tightening purse strings, he doesn't think the US situation has made it any harder for Canadians to get sub-prime products.

"I think the only thing [the sub-prime fallout] may have done is it may have given us less options on the sub-prime market. I don't hear any of my brokers say that they can't find a sub-prime person to do these mortgages."

And even if the big institutions can't help you, Rawson assures us that there are always private lenders that will offer the sub-prime product. "There really are lenders for every person; it just depends on rates and fees and what you're willing to pay," he says.

What you'll pay

Risk-based pricing makes it impossible to generalize about sub-prime rates. They're higher, but how much higher depends on factors such as credit score, the size of downpayment, and what types of delinquencies the borrower has had in the recent past.

According to Peter Edwards, a mortgage consultant with Crescent Mortgage Corp in Oakville, Ontario, it's
tough to nail down an interest rate for sub-prime borrowers and try to relate it to prime.

"One of the main reasons is that there are few sub-prime lenders that offer a variable product and, even if it's variable, the spread depends on the LTV of the mortgage to the house," he explains. The best way to describe it, he says, is that a sub-prime borrower is going to be paying more than a financial institution's
posted rates for mortgages.

Is it worth it?

The main drawback for most people is they'll pay a higher rate and sometimes fees. For many, the higher interest rate is a small price to pay to get into the housing market. For example, someone who has just established their career, and may not have enough income to show that they can afford a home, can keep growing in their job or increasing their income. A sub-prime mortgage allows them to get into the market now with very little downpayment, or even no downpayment, and start building equity.

Navigating the sub-prime maze

"It's really important that you sit down with a mortgage professional," cautions Rawson, who says that you need to find someone who can understand your specific needs and tell you what the - right product is for you. You'll need to provide either proof of income and/or an employment history.

"There are so many institutions with so many products that you really do have to have someone who'll be on your side and will sit down with you to go over all of your options," he says.

Read the rest of the article from Canadian Real Estate Magazine here.

A flexible fixed rate mortgage for borrowers whose credit score has been affected by adverse conditions.

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