How to get a mortgage (when you’re not the ideal borrower)

If you’re a credit-worthy employee at a Fortune 500 company and don’t have much debt, the mortgage world is your oyster. Banks knock on your door looking to give you the best rates, most advantageous terms and any other perks they can use to get your business. You’re an A-lister. A borrower with impeccable credentials.

But what if you don’t quite fit that mould? It doesn’t mean you’re out of luck, it just means you have to learn how to work the system in your favour.

To help you, I’ve compiled a list of some of the most common B-class borrower hurdles and the best ways to minimize the risks and get better mortgage rates and terms.

#1. Changing jobs

Lenders like longevity. They like to see a job history with current your current company that stretches back at least two years, preferably longer. So, what happens if you change jobs while going through the home-hunting process? Or perhaps you’re buying because you’ve relocated for a new job?

Even if you change jobs, a lender will want to see that you’ve been employed in a particular field for at least one year. But the new job has to be a permanent position in order to get a variable rating from the lender.

In this situation, the lender will probably ask for a letter from the current employer confirming that the position is permanent.

#2. Bankruptcy

Have you declared bankruptcy in the past? Then be prepared to have your financial and employment life scrutinized—hard. Typically, you must wait two or three years from your bankruptcy discharge date to apply for a mortgage. However, the bankruptcy will actually stay on your credit report for up to seven years from the discharge date. “This will certainly impact your mortgage options,” explains one GTA-based mortgage broker. Also, to actually be considered for a mortgage, or any other type of loan, after declaring bankruptcy, you’ll need at least one year of satisfactory credit history: that’s a year of paying all bills on time.

The best way to build a positive credit history after a bankruptcy is to apply for a secured credit card. Unlike traditional credit cards, a secured card requires you to make an initial cash deposit that’s held as collateral. So a secured credit card with a $500 credit limit will require a $500 cash deposit. But why not just pay cash for all your purchases? Because cash doesn’t help build a credit history.

#3. Poor or no credit history

Home buyers with poor or no credit history may choose to get a co-signor or guarantor on their mortgage in order to a purchase a home now. (It takes about nine months to start building up a credit history.) A co-signor or guarantor becomes legally responsible for all loan payments and for the full mortgage amount. So, if you were to miss a payment, the co-signor or guarantor would be responsible for it.

#4. Minimum age

Hey, there are some teenagers that want to get a jump-start on their future savings by purchasing a home. The Property Brothers, Drew and Scott, bought their first home when they were just 17, while a number of our readers have also taken the ownership plunge in their early savings years.

But to purchase a home you actually need to be the age of majority. In Alberta, Saskatchewan, Manitoba, Ontario, Quebec and Prince Edward Island that’s age 18. In B.C., New Brunswick, Nova Scotia, Newfoundland, Nunavut, the Northwest Territories and the Yukon that’s age 19.

If you’re not the age of majority in the province you live in, you can always make the purchase, but you’ll have to get a co-signor or guarantor that is the age of majority.

#5. Self-employed

There’s nothing more frustrating than a successfully self-employed individual trying to get credit. It always feels as if the cards are stacked against you. Thankfully, applying for a mortgage isn’t a poker game and you don’t have to bluff your way into an approval. Keep meticulous records, explains Gail Vaz-Oxlade, and that includes organizing your company and your finances long before you apply for that loan.

The primary difference between self-employed (or commission-based positions) and salaried employees is that lenders will treat your gross earnings differently. As a rule of thumb, a lender will only use 80% of gross earnings as well as the average of last tax year’s income for commissioned sales people, and net income, instead of gross income, for self-employed individuals. Also, a lender is restricted by Canada Mortgage and Housing Corporation rules to use only three years of self-employment or commissions income.

#6. More than 3 or 4 investment properties

Even if your debt ratios are well below thresholds A-lenders (such as Canada’s five big banks) will start to get nervous if your real estate portfolio starts to creep above three real estate properties. As I was told by one big bank rep: “It’s a risk because you’re now heavily weighted in only one type of asset, and typically in only one geographic area. So you have diversification issues as well as liquidity issues.”

Still, this doesn’t mean you won’t qualify for a mortgage, it just means you may no no longer qualify for the best rates or best favourable terms. If you still want to grow your real estate portfolio just make sure you consider all your financing options when your portfolio creeps up past four properties (including your principal residence).