Understanding your Credit report and the impact of a foreclosure.

Understanding your credit report

Understanding your credit report

A credit report is a history of how consistently you pay your financial obligations.  It is created when you first borrow money or apply for credit and it’s built over time.

Looking at the Canadian Bankers Association’s report on mortgage delinquency, it shows that the national average of .25% of home-owners in Canada, are having difficulty paying their mortgage.   Although this seems like a small number, it is important to note that in this report ‘delinquency’ means being 3 months in arrears with their mortgage payments.  It is therefore important that we have a look at the implications of a foreclosure, bankruptcy, consumer proposal and credit counseling.

Foreclosure:  This ‘F-word’ represents a nightmare for both property owner and lender.  A mortgage foreclosure in Canada is a legal action the lender can take if someone who borrowed money via a mortgage stops paying it back.  Foreclosure lets the lender sell or take back that person’s house after obtaining a court’s permission.  It’s important to note that the property owner does not automatically lose their property if they make a late payment, or miss a mortgage payment.  Most lenders prefer not to foreclose if it’s not absolutely necessary.

The long-term effect on a client that goes through foreclosure, is permanent.  A record of the foreclosure is placed on each client’s credit report.  Unlike a bankruptcy or consumer proposal that are eventually removed, the foreclosure stays on their credit report for life!  If such a person wants to purchase a home in the future, a lender will more than likely require at least a 20% down payment.

Bankruptcy and Consumer Proposal:  Bankruptcy and consumer proposal are administered through a licensed insolvency trustee.  Typically, every creditor that you have debt with, will participate in the process.  This will include student loans and arrears with CRA.  The mortgage industry sees both these insolvency actions as the same thing.  It is important to get back into the credit game after you’ve gone through any of these.  Banks and other mortgage lenders want to see that you can work with small amounts of credit before giving you a mortgage of a few hundred thousand.

Once you’ve been discharged from either a bankruptcy or consumer proposal, obtaining a credit card should be your very first step.  Next, you need to advise both Canadian credit reporting agencies that you were discharged.  It will be a good idea to keep all your paperwork from this process for at least 10 years.

Credit Counseling:  Some people get into debt problems for reasons that are utterly beyond their control.  For most part, the cause of serious debt issues is simply that people aren’t given the right tools for smart money management.  Credit Counseling could be a viable option for those that are keeping up with their debt payments, but need help in making a household budget to get out of debt faster.  For those that have fallen behind on their debts and 1 or more have gone into collection status, credit counselling may not be the answer.  There are 2 distinct differences between working with a credit counselor and a licensed insolvency trustee.

  • Student loans and debts to Canada Revenue Agency cannot be addressed within Credit Counseling
  • If the Credit Counseling requires debt negotiations and/or payments arrangements, some of your creditors may decline to participate.  This leaves debts outside of the credit counseling arrangement that you must address on your own.

The bottom line is:  When unforeseen financial circumstances impact your ability to make regular mortgage payments, it’s important for you to take quick action.  With early intervention, cooperation and a well executed plan, you can work together with your mortgage professional to find a solution to your financial difficulties.

Original article:  www.dominionlending.ca/news