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Ross Taylor
From time to time, our mortgage lenders need to remind us to watch out for unscrupulous types whose mission in life seems to be to arrange mortgages for people using false information.
Below is an email from one of our lenders reminding us what to look out for. Might be an education in what happens out there.
“Good day everyone
There have been a great many “bad” files lately and I thought I would send out a few tips to help you outsmart the fraudsters. In my experience, the bulk of it has been employment misrepresentation. This includes the actual client altering their own job letter or even having a co-worker generate an employment letter. Oftentimes, the income would have been provable by way of NOA’s so it was all for naught.
Misleading Information (Mortgage Brokers Act): the mortgage broker has a duty to ensure information being sent to the lender has been verified.
And the most important one. Check your documents before sending them in to the lender. ALWAYS. When you confirm employment, do not call the person who wrote the letter. Always ask for HR or payroll. If it is a Mom/Pop shop, likely we would only want NOA’s. I have found that of the “bad” files I have come across this year, had the documents been thoroughly checked and confirmed, the paper would not have even been sent to us and the deal would have been cancelled. When you call the person that signs the letter, it could be a co-worker, who has given themselves a title they don’t have or a cell number etc. We even had one instance this year when we called the letter, the daughter, who did work for HR, inflated her own fathers income but the paystub didn’t match up. Be sure to check the paystubs as well. Does it match what the letter says and what you have confirmed? Does it show on the bank statements?
At the time of application, Broker income questions which would likely translate to the lender questions:
Full time or part time?
Years employed?
Salaried or hourly?
If hourly, how many are hours are guaranteed?
Hourly rate?
If salaried, are there any other sources of income? Bonus, commission, OT? These types of additional income may or may not be able to be used depending on the length of time received. Some clients will include it all in the income they give you without breaking it down.
You cannot be too careful these days. Once the paper is with a Lender, there is no turning back.
Let’s work together to prevent this! I welcome any questions or feedback.”
Ross’s new and improved blog can be located here
Brian and Susan have down sized their home three times in the past two years. Brian used to be a self employed website designer, making close to $100,000 per year, but business dried up when the recession was in full force, and he finally accepted a job in an unrelated field paying $42,000 in 2010.
He also works part time at night stocking shelves in a local grocery store, and Susan collects $1,094 each month from the various child care benefit programs. Altogether, they bring home around $4,100 after deductions each month.
They have three small children under the age of eight, and Susan has been a full time homemaker since the birth of their first child.
Although it is only two months since they bought their current home for $382,000, they are already in debt stress. They have unsecured debts around $30,000. Their mortgage is for $309,000 with a monthly payment of $1,650 and a further $250 for property taxes.
They have few extravagances, except when it comes to their children. The two boys are in organized hockey programs, and their daughter takes frequent dance and figure skating classes.
Many parents can relate to the cost associated with such programs. The price tag is around $15,000 each year for this family. This is around 30% of their net income!
It doesn’t take a CFP designation to understand they are spending way more than they earn – hence the need to downsize their home and remove equity on a regular basis.
What can be done?
Susan recognizes she should go back to work as soon as possible. This comes with its own headaches – juggling work, after school care, the home etc, but Brian cannot work more than he is at the moment.
They figure once Susan begins working, they will be fine – if they can only clear up their unsecured debts. I am not so sure about that.
Renegotiating their first mortgage was an option, but the penalty to break it would be $12,500 – and then their new mortgage would be hi ratio – requiring an $8,500 mortgage insurance fee added onto their mortgage balance.
They then looked at leaving the first mortgage alone, and arranging a second mortgage, using the proceeds to pay off the unsecured debt.
They were quoted a second mortgage for $38,800, which after lender fees, broker and legal fees, would leave them with $32,200. Enough to pay off all the other debts. Their monthly payment on the new second mortgage (even at 13%) would be $420 versus the current $965.
Going with the second mortgage would be like putting a band aid on a broken leg.
They then began to think about moving north out of the city to Barrie, and buying a cheaper home once again. But still mortgage penalties, and they are worried about the disruption to their children’s school and social lives.
When I put together their present monthly budget, it came as a shock to them to see how they “planned” to live each month.
Without any car payments at the moment, they are spending at least $2,100 each month more than they earn. $965 of that being minimum payments on their credit cards.
And as we all know, unexpected things always pop up – home maintenance, car repairs, special occasions etc.
I suggested it was time to put an end to the downward spiral of their personal finances, and try a fresh approach and start.
This would necessitate some tough decisions. Like taking the kids out of their organized after school activities and saving more than $1,000 per month.
Like reducing their monthly living expenses – $1900 plus utilities is too much for a family earning only $4,100 per month.
This may mean selling their new home, paying off all debts, and moving into a rental home. That would leave a cash reserve and clear all their debts.
Or making the move to Barrie or thereabouts, and once again taking out equity from their home to pay off their debts.
But under any scenario, they need to be operating under a balanced budget. Simply put, some combination of increased family income and a reduction of family expenses.
If that does not happen, they will simply be “rearranging the deck chairs on the Titanic.” That is, the ship is going down no matter what.
You should care very much about your credit history. I cannot overstate the importance of building and maintaining a strong credit history. Life will go so much smoother if your credit history is free of blemishes.
A great credit score makes all the difference.
Here is an article I wrote about the importance of building your credit score as early as possible.
I am often surprised these days how many of my clients have some level of savvy about their credit score – their so called Beacon score or Equifax score.
Most of us have a credit score in the 600’s or 700’s. If your score is super duper, it is over 800. If your score is weak – it is less than 600.
I cannot stress enough how important I feel it is to optimize and maximize your credit score. I drill this into my kids right from the day they receive their first credit card – and I never stop.
Many people are proud of scores which I would consider mediocre. I personally only take a shine to credit scores north of 760 or so. (the maximum possible score is 900 – I think the highest I have seen in my client base is 870 though)
I always recommend clients order a copy of their report at least once a year from Equifax – just to make sure things are as they expect – that there are no errors in their payment history; no misreported collections or fines; no unauthorised enquiries on their credit; and no surprise credit cards. (which could mean someone else has tapped into your ID)
There are many reasons to check – go to equifax.ca or transunion.ca to create a permanent profile for yourself and order your free report today.
As a practical matter, in our experience the Equifax website is less of a hassle than the Trans Union website.
But if your credit score is important to you – maybe you want to know if you qualify for a mortgage or a new line of credit or that jazzy credit card your friends all have, then you will need to order something like Score Power™ from Equifax online or at their office inNorth York,Ontario. ($23.95 online or $10 in person at their office)
When good credit goes bad
By regularly checking your Credit Profile, you’re doing a great job of managing your credit. It’s a good way to stay on top of things.
And you know what else is smart? Being aware of the most common credit pitfalls.
There are four credit “dangers” you should always have on your radar. If you’re not careful, these situations can sneak up on you and lead to a credit disaster. So let’s be sure you know how to avoid them…
Unpaid bills
This may seem like a no-brainer, but you’d be surprised at how many people don’t realize that unpaid bills can hurt their credit. If you skip payments on anything – for example from a credit card, a fine, a utility bill, or a car lease instalment, your credit score may drop.
The biggest culprit for many people is a missed credit card payment. It’s easy to see how it happens, sometimes bills don’t get paid – maybe money was tight, or maybe you simply forgot.
Ironically, some credit cards you may never use can cause a problem. Maybe you forgot that a card charges an annual fee, yet you have not used the card in several months, and don’t even bother to open the monthly statements.
Or maybe you had some late payment problems before and you want to see if your score is improving. Perhaps that collection agency put notes on your file when you argued about yourRogersaccount or your 407 bill.
Unfortunately, missed payments can eventually result in a collections record on your credit report (and those may stay on your report for six years). And if a collections account appears on your credit report due to a mistake, be sure to work with the parties involved to get the issue resolved.
Identity theft
When someone steals your identity and goes crazy with your credit- it can mean chaos for your credit report. It’s a real, serious problem these days. But if you know how to protect your identity, you have a better chance of protecting your credit.
Are you taking steps to cut down on your risk? You should start with the following: shred everything with your name on it before you throw it away… only use your credit card on websites you know are safe… don’t carry your Social Insurance card in your wallet… and consider paying your bills online or with an automatic payment (less mail for thieves to get their hands on)
You may also consider signing up for credit monitoring. It’s another way to keep a close eye on any changes to your credit. Practically though, simply checking your own report every six months or so should suffice.
Divorce
After the hassles of going through a divorce, the last thing you need is to have your credit suffer because your ex-spouse is racking up credit card bills or missing payments. So get your credit profile and make sure all joint and co-signed accounts from your marriage are closed or refinanced as soon as you can.
Judgments
The verdict is in: judgments such as small claims are guilty of tainting your credit standing. These can remain on your credit report for six years or longer and that can make it harder for you to get the best interest rates on your loans.
You see, credit does not have to be scary. The more you know, the easier it is to stop things from sneaking up on you.
Consumer Proposals (“proposal”) are the main alternative to filing an assignment in bankruptcy. A consumer proposal is an arrangement between you and your creditors which enables you to pay a portion of your debts over an extended period of time.
The amount that you pay and the length of time you pay this amount is determined in a consultation with a trustee in bankruptcy who acts as the Administrator of your consumer proposal and is based on the amount of your income living expenses and any other financial responsibilities you have. A consumer proposal is also called a “Debt Consolidation Arrangement”.
Who is eligible for a proposal?
In order to file a Consumer Proposal, your debts must be less than $250,000 in total. These are called Division II proposals. Secured debts (mortgages on your principal residence and vehicle leases) are not included in this $250,000 figure, but all other debts must be included.
If your unsecured debts exceed $250,000 you can still file a proposal, but it falls under the Division I proposal rules. This type of proposal is well suited to certain professions which cannot, for licensing reasons, for example, consider bankruptcy as an alternative.
How does a consumer proposal help me?
As soon as a consumer proposal is filed by the administrator, the rights of the creditors to start or continue any legal or collection procedures against you are suspended. In other words, if a creditor is threatening to garnish your wages or seize your assets, they will not be able to do so any longer, regardless of whether or not they have already started a legal action.
The filing of the consumer proposal gives you time to deal with your creditors over a long period of time – up to a maximum of five years. Interest stops immediately upon filing of the consumer proposal.
It is quite normal that you and the administrator negotiate a reduction in the principal amount of the total debt, which is paid over the period of time – the length of which is negotiated with your creditors. Ultimately the amount that is payable each month and the number of months that this amount is payable is based on many factors such as:
A variation of the “normal” proposal is to offer to the creditors a lump sum “advance” payment coming from refinancing your house (via a second mortgage) or borrowing against life insurance and adding a small monthly payment thereafter from your monthly income.
This makes the proposal much more attractive to the creditors because of the lump sum payment. The downside is that you, the debtor, pay interest on the money borrowed for the front payment, but this is offset by the lower payments you make during the proposal.
In our experience, when debts begin to overwhelm you and your family, and a solution is called for beyond simply better budgeting or credit card management strategy, most of our clients are served best by either a Consumer Proposal, or perhaps even a Personal Bankruptcy.
There were significant changes to the Bankruptcy Act which came into effect in September 2009; changes which tilt more in favor of Consumer Proposals for most people.
Many personal bankruptcies will now last for 21 months, as opposed to 9 months, as was the case previously.
Bankruptcy law is pretty tight in terms of which assets you can keep, and which you must give up or ‘share’ with your creditors. It is often best reserved for people who have little, if anything, left to lose.
But many people have things they wish to hang onto – like their home equity; their business; their newish car; their RRSP’s, RESP’s, and TFSA. Or paid up life insurance policies; jewelry, works of art and antiques.
Or they may be anticipating an inheritance or some other windfall ( a large year end bonus for example)
The rules for a Consumer Proposal are less onerous in this regard. That said, a trustee will always assess your file in both ways however – to determine what is best and fair and most practical for your creditors.
Keep your money for spending on things that matter to you – as opposed to shelling out so much of your hard earned cash to atone for past problems and mistakes.
No two cases are the same.
There are many ways to deal with the problem of too many debts.
Your creditors don’t really care how you got to where you are – they care about how much of their money are they going to get back.
If you simply stop making payments, your creditors may eventually take the matter to court. If you ignore this process, eventually they can put cautions or liens on your personal property, and also garnish your wages and bank accounts.
Many people try to borrow their way out of their debt problems. This almost never improves the situation.
You may be able to fix your debt problem if you are willing to overhaul your approach to your personal finances, and enter into some kind of credit counselling program.
Your creditors like proposals where you agree to pay back at least some of the money you owe them. You can negotiate with them individually, or you can file a consumer proposal with a trustee, and when accepted, it becomes a matter of law. Your problems will be all under control.
You could file for a personal bankruptcy. More and more people file consumer proposals these days, but for some people, a personal bankruptcy is the most practical solution.
You can check your own credit score at either Equifax or Trans Union’s website. The report will remain available to you online for a month – but remember, it is changing all the time, as new information is collected and sent to the reporting agencies from lenders.
The key to having a good credit score is to have, and responsibly use, credit. Piling up debt isn’t responsible, necessary or smart.
That’s because credit-scoring formulas are extremely sensitive to how much of your available credit you’re using at any time, particularly on revolving accounts. So if you max out your credit cards or even come close, you’re likely to hurt your scores.
This is true, by the way, whether or not you pay your balance in full. The balance reported to the credit bureaus, and used in credit score calculations, is typically the balance from your most-recent statement, before you sent in your payment.
Credit scores were designed to benefit lenders by helping them gauge the risk that you would default on a loan.
But that doesn’t mean the system has no benefit for individuals. Credit scores gave lenders the confidence to make credit more available — and make it cheaper for those with good scores. That means if you’re responsible with credit, you’ll pay less for a loan than someone who has been less responsible. You won’t have to cover the risk that the other guy will default.
You can maintain a good credit score without ever paying any interest or carrying debt. You simply need to have, and lightly use, two or three credit cards, paying the balances in full every month.
It’s might even be easier to achieve a good score if you have a mix of credit: revolving accounts (credit cards) and installment loans (a mortgage, auto loan or student loan, for example).
Anyone who takes on too much debt is likely to start missing payments. A single skipped payment can knock as much as 110 points off your score right after it happens.
Paying your debts doesn’t erase them from your credit history. The credit bureaus can continue to report negative information for up to seven years after an account first went delinquent.
You may be able to persuade a collection agency to delete a collection account from your credit reports in exchange for settling the debt. But you typically won’t be able to erase what the original creditor reports about you, which means that the information that’s most damaging to your credit scores — the skipped payments and charge-off that occurred before the account was turned over to collections — will remain on your reports for the full six years.
By the way, you shouldn’t fall for a credit repair firm’s pitch that it can erase true, negative information from your credit files. These companies often flood the bureaus with disputes, but the vast majority of those disputes go nowhere, and the negative information remains on your files.
Theft is a crime. Owing money generally isn’t.
Most people who owe debts they can’t pay didn’t start out intending to stiff their creditors. In fact, many people who struggle with debt wind up draining assets that would otherwise be protected from creditors, such as their retirement accounts.
Many of us believe that skipping out on a debt you can afford to pay is morally wrong. Throwing in the towel on debts you can’t pay, however, is sometimes the best of several bad options.
Credit cards are a necessary evil in today’s society. You need to have one or two for (a) the convenience when no other method of payment will do, and (b) to ensure you are building and maintaining a healthy credit score.
Over the past year, my personal favourite has become the TD Visa Infinite card.
There are websites which track this sort of thing, specifically to advise you which are the ‘best’ cards out there – and their approach is certainly more scientific than mine.
My reasons are simply that this card has provided me several measurable benefits over the past twelve months – which more than justify the annual fee.
Insurance coverage on trips – if I pay for a trip with my Infinite card, I automatically have travel insurance – medical, lost luggage, cancellation and interruption, etc. for up to one week. Given I prefer short trips over long ones, this benefit has come in very handy.
Car rental insurance coverage – twice my car was in for extended repairs and I had no worries about extra insurance costs.
Purchase protection – ever lost or broken something valuable just after you bought it? Well, we knocked over a flat screen tv a few days after buying it on the Infinite card – clearly our fault, not a manufacturer defect – and the card provides full insurance against such idiocy.
Rewards – every self respecting premium credit card offers you a reward for usage. The TD Infinite award structure is very simple and effective. You earn points which convert to dollars, which you can then apply to any type of travel booking you like.
TD Rewards has a travel agency, so you just book your travel through them, and they immediately reduce the purchase cost by the dollar value of your rewards – no blackouts, no restrictions.
Other – Like most of us, I don’t actually read the literature when I receive a new card in the mail – it gets filed away, just in case. I am sure this card has many more benefits I have not listed. And I am equally sure there are competitive cards in the marketplace.
Find one that works for you and your needs, and stay faithful to it – you should be ahead by hundreds of dollars each year.
Dear Ross:
As a parent of an otherwise wonderful and responsible 18 year old daughter, I am struggling how best to deal with the fact that she has already run up a $750 balance on her first credit card, and she has only had it six months. The interest rate is 19.5%, and they are also charging her some nonsense balance protection insurance each month. Should I stay silent? Should I bail her out? Help?
Ross replied,
Good question – in your email you also mentioned she is presently doing a “victory lap” in Grade 12, and has a good part time job making a few hundred dollars every couple of weeks.
You said she has recently been depositing her entire bi weekly pay check into her Visa, but then continues to use the card as expenses arise. In that sense, she is treating the card like a very expensive debit card – since there are many small cash advances taken from the card – each with stomach turning fees. Example, a $20 advance from an ATM renders a fee of $1.50 from the ATM, plus a $2.50 service charge from her Visa.
So each $20 is costing her $24 right off the bat – and then there is the monthly interest on top of that. At this point, until she pays the balance down to zero, every transaction will incur interest from day one.
It is a sad fact that little formal effort is put into providing our children with a useful education in managing money and finance matters. Trial and error (mostly errors) seems to be the way to go. The school system could and should implement a mandatory course – just as they do for Civics and Career Planning, to help our teenagers prepare for financial independence.
But ideally, the education process should begin at a much earlier age – when they are in our care and we have their undivided attention and respect. All parents know we begin to lose that around the age of twelve of so 
The solution:
Work out an agreement with your daughter which begins with you paying the entire balance in full; transferring her obligation from Visa to you. You may (or may not) charge interest, but if you do, keep it modest – like around 2%. The point is not to make money at her expense, but rather to ensure she is always aware there is a cost of money borrowed.
Next, agree on a repayment plan. Seems to me if she gives you several post dated checks for $150, coincident with her paycheck dates, the balance can be repaid in less than three months.
This leaves her money to spend on an ongoing basis – either by cash spending or by intelligent use of her bank debit card (ie not incurring any service charges)
During the repayment period, you should gently insist she not use her Visa at all.
During the next few months, use the time as an opportunity to teach her about proper credit card usage, money management, budgeting etc. You want to make sure this is not a recurring problem.
Oh, and you might get her to cancel the balance protection insurance – I’m not a big fan of this product, and in any event, It’s unclear it would be of benefit to a high school student working a part time job.
On the plus side, she has recognized relatively early that she is in a spot of trouble here, and she felt comfortable enough in her relationship with you to confide her problem and seek your help – good for you !
Dear Ross – my teenage daughter has signed an apartment lease – help !
SHE WROTE
From: Angie
Sent: May-02-11 8:08 PM
To: Daddy
Subject: In a pickle…
Hi Daddy,
I need to ask you a really big favour. I got myself into a bind. I don’t know if I have mentioned this to you but I was seriously considering moving to Ottawa for September. About 2 weeks ago, I was sure of this, but being me I am now hesitant on the actually doing it.
Here’s my issue, Sammy has already signed a lease for May – till April I believe, and had to write $4000 worth of cheques to the owner of the apartment. At first I agreed to this, knowing full well that I would be paying for the duration of the summer. It’s $500 per month, but there will be sub letters from May to August, meaning I really would only be paying $200 per month and getting $300 back each month from May -August.
The first cheque is due tomorrow and I really cannot afford it, Sammy is putting a $100 towards it so the remainder is $400. I wouldn’t ask you for this, really because I want to be more independent, but my indecisiveness is making me seem irresponsible and I am now affecting others as a result.
I would really sincerely appreciate if you could give me the $400. And Sammy will be trying to get the sublet money by the end of the week or the beginning of next, so I would be able to pay you $300 back asap, and the remaining $100 I can give you with my next pay cheque.
I know this is a lot to ask.
Love, Angie
DAD WROTE
From: Daddy
To: Angie
Subject: RE: In a pickle…(please read the WHOLE message)
Date: Tue, 3 May 2011 08:43:59 -0400
Honey – I know you only want to see a one word answer that solves the problem, but this time I cannot give you that answer.
Now before you get all upset and do something rash (like a visa cash advance) PLEASE read on and try to absorb what I say below.
First, I’m not just your daddy – I am an older guy with tons of life experience who has and will survive just by solving problems and finding solutions and drawing on all my knowledge and failures and successes to make good decisions (not all the time to be sure, but my batting average is pretty good)
I want you to feel comfortable enough with me (as I do with YOU) to confide in me and ask me and seek guidance etc, before you do something major – not so much as your daddy who may or may not approve but rather someone whose opinions you trust and who can add something to your thought processes.
About your situation – it was a bit hard to follow – and no, as you probably know, you have not said one word about this before to me – it sounds like you are saying…
“Sammy and I decided to move to Ottawa and rent an apartment together for a year. For whatever reason, it is his name on the lease – the lease starts May 01 2011 to April 30 2012
The rent is $500 per month. My plan is to join him (or move in) in September. Till then, the place has been sublet (by Sammy? Maybe by the owner of the apartment?) We are supposed to pay the rent till then, and get back the sub tenants’ $300 per month”
(Maybe I have it wrong, maybe Sammy just signed a lease for you and it’s only you planning to move to Ottawa Angie)
“Anyway, I (we) don’t have the money for the first month. Actually we don’t have the money for any future months.
Worse, I am not sure – in fact I am pretty sure I do not know if I still want to do this (move to Ottawa)”
You see Angie, it’s not just a $500 problem today – this will be a recurring problem for the next twelve months – potentially a $6,000 problem – which is very serious money.
So, given the fact you no longer intend to go to Ottawa, I feel you should not even start to fix this money problem – it is better to say screw it now, and don’t go down this road. Try to get out of the lease agreement.
The fall out (financially) does not have to be that bad – yes Sammy’s name is on the lease, but practically if he does not assume the lease, the landlord will simply find another tenant (they must do that by law) and chances are all will be forgotten.
Sammy would advise his bank to put a STOP PAYMENT on ALL the checks he has written. Otherwise the landlord can continue to go into his bank account randomly to see if any of the checks can cash. (This step is VERY important)
The place, you say, will be sublet for the next four months – so the landlord will receive partial rent – they have LOTS of time to find a tenant for September. They will only be out $200 times 4 – $800. For that money, they will likely just swallow hard and move on. Possible they would start a small claims court action – but from experience I can tell you it’s not worth their time and expense.
BETTER they have an $800 problem than you (and Sammy) have a $6,000 problem.
I am ok to sit down with you (and Sammy) if you wish to discuss what I am saying and what can happen – this maybe hard for you to understand here – but again, my opinion is you guys should do nothing – let the checks bounce and don’t make decisions like this again until you are ready – financially and emotionally and practically.
I feel pretty strongly that my advice (from what I understand from your message) is good advice – and that you will only be making a bigger stressful mess for yourself if you follow through with your plans.
I can talk on the phone anytime. If you wanna get together – it would need to be after school.
Much love and DON’T PANIC
DAD
SHE WROTE
Hey daddy!
Sorry for my late response, please don’t think I was angry with you or anything like that,
just a whole lot is going on right now!
I completely understand everything you are saying, and realize that you know a lot more
about this than I do.
I’m just stressing out right now.
I’ll see/talk to you soon!
Love Angie
