The Art of A Non-Deal

More often than not, a mortgage broker is where some people turn to when all else fails (and by all else, that usually means their bank). A mortgage broker is sort of like a tow truck driver. We will arrive shortly after you call and with a few questions, try to get that stalled application to the nearest garage and get everything going so that you can move into your new home with the least amount of hassles. I know, it's a mixed metaphor but so is real estate.

Although some of us may not look it, in theory we are mortgage mercenaries; going where others fear.

We all graduated from Whassa Mater U.

Truth is, some applications just can't be done no matter what. It's a hard truth to bear but when the balance of the 5 C's are against you, you're going to be in for a bad time.

To review the 5 C's;  Character, Conditions, Capacity, Collateral, Credit

Perhaps it's wrong of me to write a blog post of where I failed to be able to provide financing to potential home purchasers. I should be writing about all the successful mortgages I've been able to put together, with amazing interest rates, rock-hard options and a chocolate waterfall thrown in to boot.

Those will come later. But if you are reading this you are for some reason interested in mortgages either now or in the future and like Canucks GM Mike Gillis and his 2 starting goalies dilemma, you want to learn from past mistakes and avoid any long-term commitments and signing anything that lasts 10 years.

Booyah! Yeah, I went there!

Case Study

Once there was a couple who wished to purchase a 2010 mobile home in Alberta, Canada and had been refused by their major commercial bank for a mortgage of <$140,000.
The couple had both gone through bankruptcy in the previous 5 years and were currently renting the home from the man's brother who wished to sell it to him so he could buy his own home. The husband had been working in the construction industry for 17 years but in a new job for the last 8 months. He worked a rotating 9 day schedule with an estimate >$68,000 a year income. He was a co-signer on to 2 vehicle loans, a 2011 Jeep Patriot and a 2008 Jeep Wrangler.


Problems; 

The first problem is that they both have been through bankruptcies. With one already having poor credit and no employment, it was pointless to have her on the application.
 
The second problem is his short job history. Although he has been working in the field for nearly 2 decades, he is with a new employer with less than 1 year of experience.

Third, the vehicle loans- combined they equalled $52,000. The applicant was responsible for both car loans as well as all the financial responsibilities related to any approved mortgage. While the bankruptcy casts a good shadow on this application, an extra $52,000 doesn't help. There were also 15 credit inquiries from car dealerships since the bankruptcy; 20 altogether.

Fourth, and this was probably the final nail in the decline coffin- there was no land associated with this deal. The applicant was purchasing a mobile home on a pad. Technically, a mortgage is based on the assumption of a land-based deal and because certain lenders require a minimum loan purchase amount, his low amount was below their threshold.

What went wrong? 

Character; I'm sure this man is a decent hard-working guy. I have no problems with his character, per se; he's working full-time in a lucrative, yet labor-intensive field, He is supporting his wife and although they may have gone through personal bankruptcies, i might be able to overlook it if the other C's are okay.

Conditions; He's been employed for only 8 months. It's a mobile home that depreciates in value, unlike a fixed foundation house. That's on the fence; meaning if he had a fence, the lenders would consider that a plus.

caveat; fences should connect in at least 3 corners

Capacity; He's supporting his household as well as already owing over $50,000 in car loans. What happens if he is no longer fit to work? Who takes over these loans then? This is a 1 income home with no secondary source of income.  

Collateral; He has no collateral to speak of; his vehicle assets are tied in with his car loans which cancel each other out.

Credit; His credit is awful. No two ways about it. He's been bankrupt in the last 5 years and already owes $50,000 in vehicle loans. He's applied for credit over 20x since his bankruptcy - with each inquiry knocking points off his credit score.

When you see it laid out like this, it becomes pretty obvious why he was declined.

Potential Solutions;

1) Downsize the personal debt. Purchasing a brand-new vehicle is pretty self-defeating, especially when you are in the lean bankruptcy years and are supposed to be aware how interest rates and depreciation work. He needs to sell one or both vehicles and buy a decent used vehicle that gets him to and from work (preferably in cash). This helps his Collateral, Credit, Capacity, Character values.

2) Avoid attempting to gain any further credit via credit cards or small loans of any sort. Just don't do it. If possible, borrow from family who's interest rates are off the books. This will help his Credit value.

3) Secondary Income; if his wife pulled in an extra $1000 a month with a part-time job, that's an extra $12000 a year and she could be listed as a co-applicant- doubling the Character, Capacity, Collateral values.

4) Time. This is a lose-lose situation for the realtor involved and the would-be buyer but what needs to happen is that the buyer needs to figure out a budget (and us mortgage brokers can help with that!) and stick to it. A decent budget should help him put aside money for purchase (collateral) and create realistic expectations inside of a year. Capacity, Collateral, Credit, Character

and who knows character better than this guy?

At the end of the day I was not able to get financing for these folks. They were given options to either pursue private lenders or discuss with the seller about a vendor take-back mortgage or rent-to-own (to be discussed at another time).

Well, that's it for this post. Let me know if you found this helpful in the comments below or just give me a email through here for any other questions you may have.