In my last blog post titled Credit, Income, Net Worth – What’s Most Important to Lenders – I touched on how the new mortgage rules have forced lenders to focus mainly on your credit score when deciding to give you a mortgage. This is creating all sorts of problems because a credit score is just a one dimensional view of your financial strength. And before you attack the banks, trust me, they hate it even more than you do. Don’t forget, these are government rules, not the banks. The good news is that anything that’s scored is bound by a set of rules, and once you know them you’ll have no problems producing the desired result.
So why am I writing about credit scores? We all know that if pay your bills on time, and don’t carry too much credit card debt you’ll be fine – right? Well, that’s 40% correct. You see the issue is in 2016 Equifax changed their credit scoring model and it’s had a huge impact on how scores are being calculated. The result is I’m seeing more people with lower scores.
Here are a couple of real-life examples:
A Couple Renovating:
The Situation: A cute young couple decided to renovate their kitchen, two bathrooms, upgrade the windows and a few other items. The total cost of the renovation is $75,000. They financed the renovations with their credit cards (to get the points) and then paid off their credit cards with their line of credit to avoid the high-interest cost. In total, the renovation took 3 months to complete.
The Problem: Since the couples’ credit usage suddenly increased and stayed at a higher level for 3 months, their credit score dropped below 680 points. They came to me since their lender couldn’t give them enough money to pay off their renovation bill because of their credit score was below the 680 cut off point…which the lender had recently implemented because of… you guessed it…the new mortgage rules.
The Solution: Much to the client’s relief, we found them a lender that was able to stretch their guidelines to make it all work.
A Financial Prudent Couple:
The Situation: A professional couple with excellent net worth and excellent income want to buy a vacation condo in Whistler.
The problem: They don’t believe in using credit cards and as a result have one credit card with a $5,000 limit.
Since the clients have one credit card, they take it to close to limit every month and then pay it off in full. From the credit scoring algorithm’s perspective, it looks like the card is always at the full balance. The result is their credit score is impacted and is below 720. Since their score is below 720 they are not able to take advantage of a rate special from one of the lenders.
The Solution: We were able to find another lender with a similar rate, but the product had a few restrictions that limited its flexibility. We also advised the client on how to increase their credit score by increasing their current credit limit and applying for a line of credit.
With both of the above examples had the clients done these transactions in 2015 they would have had no problems at all. As you can imagine, this one-two punch of mortgage rule and credit score changes are catching some people off guard.
So what’s the solution? In the next post, we’ll cover the 5 things you need to do to make sure you have rock star credit. Well maybe that’s not the best analogy, but I’ll show you a few tweaks that will ensure you’ll have no problems getting the mortgage you need at a rate you want.