Vol 2:3 The New Financial Literacy for Homeowners Part 1
I have a real distaste for being represented by a number.
And I have that Robin Hood streak that I mentioned in last month’s Scott McGillivray piece.
Grading, for example, is a practice that is almost singlehandedly responsible for the absence of risk-taking in our institutions of learning, and yet risk-taking is a crucial pre-requisite to learning. Argh! This makes me crazy.
Step on the scale? Never.
Let my age dictate my capabilities? Not going to happen. Keep that propaganda away from me. (I really like that commercial where the gorgeous white-haired woman is doing the final inspection of her hair and make-up in the mirror and then delivers the line “They say that people let themselves go at a certain age. I wonder what age that is?”)
So, you can guess my feeling on credit scores.
I have somehow managed to avoid these my whole life up to now. Not that I don’t have one or that it has never been accessed on my behalf, just that I have never asked or been told what my number is – it always seemed like a pass or fail system to me anytime I needed to use it.
When I tune into what I really know about credit scores, I am aware that I have only the foggiest of idea of how they are calculated and that the thought of them makes me feel a little uneasy.
Last month, clients of mine got to within 2 business days of buying a home before CMHC unexpectedly killed the deal. Mike and Debbie (not their real names) had been pre-qualified by a lender, we had successfully negotiated a good deal on a home that was a good fit for them and we were just about to bring in the home inspector to make sure that there was nothing that we had missed when CMHC balked at something in their credit report and refused to insure their high-ratio mortgage. The only way to save the deal was for Mike and Debbie to increase their down payment to the 20% required for a conventional mortgage, and that just wasn’t in the cards. (As an aside: have you tried to save a down payment while renting lately? You almost have to have a lifetime of biblical length for this strategy to make sense. Many of the first-time homebuyers I have been working with lately have been living with family, sometimes for years, in order to save enough money for a down payment and closing costs.)
Mike and Debbie were crushed, and I was crushed for them. In an effort to understand what had happened to them, I sought out my most trusted contacts in the mortgage industry to talk about credit reports and to get their perspectives on what had gone down. I had some eye-opening conversations that made realize that an update of my financial literacy was in order.
Final Final Approval
There are a few key elements to financial literacy, and I’m going to start with financing approval. Not the kind you get when a lender gives you the green light to start looking for a house in a certain range, but the kind you get after you’ve successfully navigated the entire buying process and a SOLD sign is swinging in front of your dream home - the final kind.
Except that, these days, financing approval isn’t final final until the money actually changes hands, usually within a few days of taking possession. And guess what?
Mortgage lenders reserve the right to take a last look at a client’s file at any time before possession and change their minds.
Change their minds!
After they’ve given final approval and buyers have removed their financing condition from the offer to purchase. How this is even possible is beyond me.
We used to hear of this happening the odd time, but the stories had the feel of a playground myth – like the one about the kid who swung so high on the swings she swung all the way around.
Lately, however, these stories have become commonplace and closer to home and the new reality for mortgage brokers and real estate agents is that protecting our buying clients means making sure they know how to conduct themselves financially in a safe way between the SOLD sign going up on the house they just bought and actually taking possession of it.
Practice Safe Financing
Here it is in a nutshell - freeze your financial picture until possession day has come and gone.
There are two basic components to this, and they involve your income and your credit rating:
Any change to your income stream before you take possession is guaranteed to freak out your mortgage lender and cause them to pull the plug regardless of whether you think you’ll be fine or not – make no changes to your employment whatsoever.
Other changes to your income, like family allowance ending or the commencement of a maternity/paternity leave matter too, but will have been discussed and already taken into account if you are working with a mortgage specialist worth his or her salt.
Next up, your credit rating - anything that might affect it must be avoided at all costs because, as we are now experiencing, lenders reserve the right to review your credit rating even at the very last minute and they will. So….
Don’t apply for any kind of credit – no credit cards, no loans of any kind, no “don’t-pay-for-a-year” arrangements,
don’t close any accounts or cancel any credit cards,
don’t buy anything with the credit you already have – not with your credit cards or with a line of credit. If you can’t pay for what you need with the cash you have on hand, don’t buy it now,
be fastidious about making all of your current payments on time, and
do not co-sign a loan or act as a guarantor for anyone else.
None of this is relevant to what happened to Mike and Debbie because they hadn't even gotten that far in the process before hitting their stumbling block - CMHC's interpretation of their credit report. So, I turned my attention in that direction.
Understanding Credit Scores
A mortgage broker colleague had sent me one of those Top 10 Things You Can do to Improve Your Credit Score articles, so I started with that. There were some real red flags in there, like this one, “the credit score you get on your own will likely be higher than the one you get from your mortgage broker.”
The number you pay to get is not the number? How is that useful? I stopped reading and picked up the phone – time to drill down on this credit score thing.
In 30 minutes I will be meeting with Mortgage Specialist Laurie Kotak of Castle Mortgage to go over the credit report I authorized her to access on my behalf. The plan is to start with the big number reveal and then she is going to answer all the questions I have about this number, what it does and does not mean, what happens to move it higher and lower, why in the world it changes depending on who asks for it and whatever else comes up as we go along.
To tell you the truth, I feel a little anxious about this meeting. Maybe you can relate. It feels a little bit like going to the principal’s office. Yuck.
Stay tuned. All will be revealed in Part 2 of this series, out in the next week or so.
Just a quick reminder that I am never too busy to answer any real estate related questions that you or any of your friends and family may have. (204) 979-0640