House Rich, Cash Rich: You Can Have it All - Part 4
Eric Putnam
Burlington Post
September 2009
Dreaming of your own home? By doing a few smart things now, you can be house rich and cash rich.
Part 4: Good Credit Track Record is Like $ in the Bank
Jin, Sarah and Fatima decided to pool their savings and buy their first house together. With each planning to contribute $10,000, they were excitedly looking over real estate listings and waiting to hear the size of mortgage they would qualify for. When the phone rang, the news wasn’t good – they were turned down for a mortgage because Sarah did not have a credit track record.
If you plan to take out a mortgage to purchase a home with friends or family, every person whose name is on the title of the property needs a credit history – a record of debt payments. Mortgage lenders will check each person’s record with the credit reporting agencies to find out whether that individual is a good credit risk. If you have never had a loan or a credit card in your own name, you may not be able to secure a mortgage.
So, if you plan to purchase a home, start building a track record as a trustworthy borrower. Begin by applying for a small personal loan or line of credit from a bank or credit union. This will be reported to the credit reporting agencies and will begin establishing your credit profile. If you have no credit history at all, you may need to ask a family member to co-sign the loan with you.
You can invest the funds from the loan in a registered retirement savings plan (RRSP) and later withdraw some of the money to use as a down payment for a home. The federal government’s Home Buyers’ Plan allows Canadians to withdraw up to $25,000 from an RRSP – tax-free – to buy or build a home.
Be sure to make your monthly loan payments on time so that you build your reputation as a responsible borrower.
If you lack any credit history, you may have to apply for a secured credit card. This means you must deposit money into a savings account with the card issuer to serve as security. Generally the credit limit is at least 100% of the deposit, so for a limit of $1000 you would have to deposit $1000 into the savings account. Each time you use the card and make payments on time – and you don’t exceed the credit limit or accumulate a balance worth more than 50% of the limit ($500 in this example) – you are building a positive credit history.
It will take a year or so to build a track record that will satisfy a mortage lender. If you are having trouble building your credit performance, speak with a qualified financial counsellor who can help you develop a strategy. Don’t rely on payday loan companies or “instant credit” companies – you could end up paying steep fees – and you won’t help your credit profile. Instead, carefully build your reputation as a good credit risk and you can soon make your dream home your real home.
Eric Putnam is a senior advisor with BDO New Beginnings (www.bdonewbeginnings.ca) and Joyce Brown is a counsellor with BDO Dunwoody Limited (www.debtworries.ca). Both help individuals resolve their financial problems. You can reach Eric at 1 (866) 926-4700 or eputnam@bdo.ca and Joyce at (905) 524-1008 or jbrown@bdo.ca.
