Expert: Cinzia Dalgarno - 7/17/2009

Question
QUESTION: Hi There,

Last week friday we went into our local credit union for a mortgage on an acreage outside of town. Sat down and went through everything...everything was great but about 5 years when i returned a lease car before the lease was due. This resulting in a blemish in my credit score, although the amount owing for the difference was paid. So both credit bureaus now show "bad lease account" "balance owing = 0"...there are no late payments, other bad debts nothing and our score is mid 600's..other than that everything we talked about was perfect..so we went out made the offer, they accepted, we put down the 5% deposit and so forth. Now today (Thursday the bank informs us that they don't think CMHC will give us insurance at all (where was this when we first came in and talked it all over i dont know!)..so they just sent it off to try and said they will let us know Tuesday becasue they are closed monday for some reason..

so my question to you with your experience do you think we will have a problem with the insurace with the facts given here?

we want to just walk away now from this bank and go to another but we are just too involved right (since it has been almost a week already) or not really ??

Thanks in advance,
Dave & Family

ANSWER: Hello Dave.
First, regarding CMHC: their policy states that one must have a minimum beacon score of 610, for 90% - 95% ltv (loan to value ratio) mortgages. Therefore, if your scores are both in the "mid 600's", you should be fine with CMHC.
Here is a link to the CMHC website where it outlines this policy:
http://cmhc.ca/en/hoficlincl/moloin/hopr/hopr_001.cfm

Regarding your credit bureau: without looking at your bureau, I can't speak intelligently about what the bank might be taking issue with - however, I would have to say that 1 issue 5yrs ago should not have a huge effect on your beacon as to bring it down to "mid 600's". Have there been more recent late payments on accounts? These would have much more of an impact, and indeed, CMHC will have an issue with your credit regardless of your beacon score, if you show any R3's (meaning you are behind by 3 months) within the past 12 months on any of your trades (being the various facilities you might have - credit cards, loans, etc).

Finally, regarding the bank: you indicated you went to the bank last week, and discussed your wish to purchase this property - but did the bank give you a commitment? If they did, then they are on the hook to help you complete this purchase, assuming you fulfill all the "conditions" listed on the agreement. If they did not give you a commitment, what you had was a conversation with a bank employee, who gave you their opinion. If this is the case, the bank has not approved any facility on your behalf, and you should not be assuming that they will help you with this purchase.

Assuming they did not give you a commitment:
First of all, you mentioned you made an offer on the property; I am hoping you used a reputable realtor to assist you with the purchase, and he/she has placed several subjects on the offer for your benefit. One subject particularly important in your case is the "subject to financing" - this will allow you to cancel the contract, if you are unable to find a bank who will lend you the money to purchase the property. Please go and check on this.

Regardless of whether you can or cannot get out of this contract, clearly, your goal is to purchase a property, and you need a mortgage to do this.

Therefore, I would strongly suggest you find a reputable mortgage broker in your area. They will take down all your personal information, and will be able to send your application to any of several banks, who they feel will indeed be willing to give you a mortgage. The added advantage of using a broker is that we automatically get the banks "best discounted" rates, whereas you, as a consumer going into a branch, may not.

However, the first order of business must be that you understand the urgency of your current situation, and to do that, you must determine 2 things: 1) is there a "subject to financing" clause in your purchase agreement (and has it been removed). 2) determine if you have a commitment from your bank. If these 2 items are not in place, you may wish to check with a lawyer, to see what your next step should be.
Hope this was helpful to you,


---------- FOLLOW-UP ----------

QUESTION: Hello!

Thank you so much for responding so quickly !

In regards to the bank, yes they provided me with a pre-approval on the mortgage, thus being the reason that we felt comfortable in handing over the $9,000+ for deposit and down payment.

The reason that our scores are in the mid 600's is because we have been canceling credit cards prior to going after the loan. To help with our debt ratio, then finding out the hard way that canceling credit cards can actually put ur score down ! ! But there are NO late payments, No over-drafts, No bad comments what-so-ever (everything is always paid and paid with more than the min payment) till 5 years ago with the lease return which is showing up as an R-9 because of breach of contract by returning the car early. Although, it is carrying a 0 balance because i did pay all fees and balances left over from that account after the fact. Would you be able to speculate if their will be issues with the insurace because of this? Just because after the Pre-approval they have changed their tunes saying their will be issues with insurance on this matter.

Thanks again,
Dave & Family  

Answer
Hello Dave.
The bank has given you a pre-approval, and then after the fact, has indicated to you that there could very well be a problem with obtaining CMHC approval, due to your credit bureau?
The bank has some responsibility to get this approved, since they were aware of your credit issues prior to providing you with the pre-approval, as well as being well aware of CMHC's policies, and gave you a pre-approval in good faith.
Yes, "subject to CMHC approval" would have been one of the conditions of the pre-approval, however, that should only be in reference to the property - they should have obtained an approval of your credit application, from CMHC, for the pre-approval. If they did not do that, they still were aware of CMHC's credit policies, and should not NOW be telling you that CMHC may have issues with your credit.  
Having said that, it seems very fishy to me; As I mentioned in my previous response, CMHC should not have an issue with your credit bureau, if indeed, the only derogative is the lease facility from 5yrs ago which you paid off prior to 12 months ago, and you have other paid-as-agreed trades.
If you trust the bank you are with to do what needs to be done in order for your mortgage to get done, then sit back and let them do the work - I assume you have given them the purchase agreement; their pre-approval would have contained several conditions - again, I assume you are working on gathering all the info they have asked for. Once you do that, all that is left is for them to review all the documents you've provided, find them satisfactory (or not), and then provide you with a condition-free commitment - hopefully, all in time for you to remove the "subject to financing" clause in your purchase agreement, which I sincerely hope you have.

If, however, you find yourself not trusting that your bank is working towards your best interests...then you have a few options:
1. find another bank, and hope that they will give you what you want. (time consuming, may or may not work, may have to find a third bank if this doesn't work)
2. find a good mortgage broker, and let them do the work for you. (likely your most efficient option - a broker can look at your deal and tell you before it ever gets to a bank, whether it will fly)
3. give up, and advise your realtor that you are unable to get suitable financing for the purchase. (not, I assume, what you wish to do).

As an aside, I should tell you that closing a few of your credit cards should not have a derogatory effect on your bureau. This would only be a problem if you closed ALL the trades - good credit does mean that you have credit, you use credit, you repay your facilities in a timely manner, etc.

Hope this was helpful to you,