Recently one of the real estate agents I work with introduced me to Jennifer* and Mike*, who’d run into problems getting a mortgage on a new property they were buying. Their current home, which had been sold, had carried a $1.2 million mortgage with one of our big banks. Their bank was willing to give them a mortgage on their new property, but there was a catch. They needed a $1.5 million mortgage, and their bank agreed to give it to them only if they paid off and closed their $150,000 line of credit. That was a deal-breaker for them, as they had the funds allocated for another purpose, and they didn’t have any liquid investments that they could access. Their other financial institution had initially told them they’d offer them a mortgage, but in the end they turned them down flat.
Their incomes were solid: Jennifer worked in a small law firm, with an income of about $200,000 per year. Mike, meanwhile, was the head of IT for a marketing company, making about $275,000 per year. They should have qualified quite easily for a $1.5 million mortgage. So why did they get turned down?
What had happened? Why were they having problems getting a mortgage?
In delving into their story, the following facts came to light.
They’d gotten into financial trouble. “It was not a big deal at first. A couple of mix-ups on transfers to the bank when they were taking our mortgage and line of credit payments out. We were too busy to catch it in time,” Mike said.
From there, things snowballed. “We knew we wanted to move closer to our jobs, and the kids would be heading to university soon,” said Jennifer. “So we figured we needed to do some renos on the house, so we could sell for a good price. Of course the renos went over-budget. Then the bank wouldn’t lend us more money because of the missed payments. After maxing out our credit cards, we realized we needed a plan B, so we borrowed from a friend who does private mortgages. The rate was high, but better than the credit card rates, and the payments were lower. We planned on paying everything out with the sale of the house, but because of the $2 million price tag, it took a lot longer to sell than we expected. Meanwhile, other expenses piled up. “
Getting the mortgage figured out
I always believe in focusing on the strengths of my clients’ finances when presenting their application to lenders. So in this case, the solid income and good net worth were all strong positives. The catch was their credit. Their credit scores were a little on the low side, but that is not unusual with business people who have a lot of credit available and in use. One red flag however was that late payments on their mortgage showed up in the last 12 months. That, combined with the large mortgage amount, and today’s nervous mortgage climate, meant that the mainstream lenders were not comfortable proceeding.
I work with a number of alternative lenders we can access. I got several mortgage offers for the clients. The best of these came from a bank lender who does a significant amount of “B lending”. Their offer: one year term, 3.99% rate, 1% lender fee. Jennifer and Mike were not thrilled with the rate and fee, given that they were coming off a mortgage where they’d been paying a variable rate well under 3%. But unfortunately, the missed mortgage payments were a deal breaker for the A lenders. Mike and Jennifer could either walk away from their purchase, risking a lawsuit and the loss of their deposit, or bite the bullet and take the one year term.
Mike and Jennifer decided to take the offer, and in the end were very happy to get their new house without having to break their long-term investments or sacrifice other plans.
In the coming year, they are focusing on several aspects of their finances:
- making their credit absolutely impeccable
- ensuring that no payments are missed on the new mortgage
- building up a more liquid emergency fund for unexpected expenses
At renewal time, the plan is to negotiate a renewal offer from the bank with a significantly better rate, given the (hopefully) improved credit. Because the new bank does both B mortgages and A mortgages, switching to the A side is quite straightforward. If the clients aren’t happy with the offer, we can look at switching to another A mortgage lender if they have a better, rate, terms and/or conditions. Either way, taking the B lender mortgage was a stepping stone to allow them to purchase the home now, with the expectation that it was only a temporary measure until they resolve the issues that kept them from getting the A lender rates.
What happened to Jennifer and MIke could happen to any of us if we’re not vigilant about our finances. They were lucky to be able to still move ahead and buy the house without too much cost and sacrifice, and it’s now in their hands to be able to move on with their lives and get back to “mainstream mortgage lender” territory.
What would you do in this situation? Have you experienced problems getting a mortgage? Any thoughts, experiences you’d like to share?
* Names and identifying details have been changed to protect the clients’ privacy