Last updated: May 2019
One of the things I like about being a mortgage broker is a real opportunity to help people out when life throws them a curve ball. Recently my phone rang from a self-employed mortgage holder, a couple trying to get some options as they had fallen behind on their mortgage payments, not to mention numerous other credit cards and, bills.
"We're Behind on Our Mortgage Payment"
Here's what happened. Hubby has worked in the trades for a good chunk of his working life as a welder and a pipe fitter. In the past few years, the joint pain in his knees was becoming so severe to the point that it began to affect his ability to perform his job, hence earn the income they were accustomed to. Finally, the decision was made for knee replacement surgery, a surgery date was set, and leading up to that they saved hard and budgeted for 6 months of income loss while he recovered. The surgery was in late 2013 and by mid 2014 the recovery was not going well. In the second half of 2014, still unable to resume work, the line of credit then the credit cards balances began to grow and they tried at least to make the minimum monthly payments. Finally maxed out on credit, their utility bills became overdue, then in early 2015, the first mortgage payment was missed. As you might guess, their credit scores suffered incredibly in 2014 with the payment delinquency diving from awesome scores in the 700s down to low 500s, much too low for any mainstream bank lender. To further complicate things, being self-employed, they have always maximized their reported expenses in order to minimize the income they earn for income tax purposes. So on paper it didn't look like they made much money even before the surgery... that's when my phone rang.
5 Things To Consider Before a Potential Cash Crunch Occurs
Consider the Cash Crunch Possibility Today. Income loss can result in many ways: loss of a job or contract, economic downturn, injury, illness, family emergency, etc. Searching for options after the poop hits the fan can often be too late or severely restrict your borrowing options.
Keep Abreast of Mortgage Lending Rules. Lending rules change often and have changed a lot for self-employed borrowers - it is much harder to qualify today. An assumption that you can get more money from your current lender is likely false. Keep abreast of what it takes to qualify and consider getting a standby credit facility (line of credit) before you need it. A good mortgage professional can help.
Protect your Credit Score. Missing payments damages your credit rating and severe damage (over multiple months with multiple accounts) will take at least 2 years to get back an "A" rating, hence may restrict your borrowing options.
Protect Your Income. When is the last time you talked with an insurance broker? Consider whether you have sufficient insurance coverage in the event of death or illness. Is your income protected in the event of long-term disability or death? How will you make your payments in the event of a disruption?
Have a Plan. Banks and creditors get upset when you ignore them. Contact them early, at the first whiff of trouble, and let them know what is going on, determine what flexibility they have and involve them in the solution. Call them before they call you!
Cash Crunch Resolution
Luckily for these self-employed mortgage holders, they only owed $160,000 on their house and the home that was worth $320,000, so they had a fair bit of equity they could tap into and there are alternative and private mortgage lenders offering solutions for these situations, and on fair terms. While Hubby had only just resumed work, it was too early to tell whether he had made a full recovery, or was back at it purely out of necessity. (Loss or potential lack of income to make the mortgage payment is a concern to any mortgage lender so we had to get creative, with a “payment reserve”).
Here is how we proposed to solve their problem. In these situations, a self-employed Canada mortgage borrower showing low personal income on their income tax return can often borrow up to 65% of the appraised value of their home, so $208,000 max lending in their case. The amount of money they actually needed to borrow to get them back on their feet worked out to about $200K. Here's how the money gets allocated:
|$160K||to pay off (replace) the existing mortgage lender and line of credit|
|$ 20K||to pay off utility bills and credit cards|
into a new mortgage payment reserve/bank account (set up to automatically pay their pay their mortgage for the next 12 months giving them time to get their cash flow going again)
|$ 5K||in setup fees including appraisal, lawyer, lender and broker fees|
|$ 3K||into their jeans for emergency funds|
Total new mortgage lending. Clients able to get back onside financial with all creditors, payment relief for 12 months, and start rebuilding their credit scores.
A Final Word
Being at slightly higher interest rates, these alternative mortgages and private lenders are temporary solutions for temporary financial setbacks, not long-term. The mortgage goal for these clients is to get back into mainstream bank “A” lending as soon as possible, which means they need to heal their credit records and establish an acceptable income profile for “A” mortgage lending purposes. The damage to their credit rating was fairly severe, and my assessment is that it will take 2 years for their credit scores / reports to heal, and to get their earnings normalized and reporting sufficiently for an "A" loan. The good news is that we were able to help them out.
Click the link for more information on mortgage payment difficulties.