Some potential new home buyers are entering a market already burdened with student loans and credit card debt, making it very hard for them to qualify for a mortgage. Existing homeowners may be finding their equity eroded by taking on too much credit card debt or refinancing heavily with a home equity loan.
As REALTORS®, you are in a unique position to be able to help your clients who may be experiencing financial problems.
Too Much Debt to Qualify
When a client is unable to qualify for the mortgage financing necessary to complete a potential sale because they already carry too much debt, it’s time to preserve the long-term relationship. Rather than allow that person to walk away from their dream of home ownership without any hope, it may be time to recommend they speak to a professional about restructuring their existing debt load.
There are two primary options in Canada for individuals who no longer have the capacity to borrow and are looking for a formal program to reduce their debt:
- A credit counselling agency
- A bankruptcy trustee.
Credit counselling agencies offer something called a Debt Management Plan. Under a debt management plan the client must be able to afford to pay back all of their debt in full. A debt management plan does not offer the ability to settle debts but can provide the benefit of interest relief during the repayment period. A credit counsellor will negotiate a repayment program that allows the client to repay debt included in the plan over a period of three to five years. Certain debts cannot be included in a debt management program including co-signed debts, secured debts, student loans and tax debts. A debt management plan is a good option for individuals who owe a small amount in simple debts like credit card debt that they can afford to pay off with some financial guidance and support. A debt management plan will appear on their credit report as an R7 and will remain there for two to three years after they complete their payments.
A bankruptcy trustee can help eliminate debt through either a Bankruptcy or a Consumer Proposal. Both programs allow a client to eliminate all their unsecured debt for less than they owe. Debts like tax debts, payday loans and certain student loans are also included. Both are good options if someone owes more money than they can repay and are in need of a fresh financial start. Both options will also appear on their credit report – a bankruptcy for six to seven years and a consumer proposal for three years after their payments are completed.
Downsizing the Right Way
Where an individual is considering the sale of their home because they are in a cash crisis, as their REALTOR® you can help ensure that they complete the sale in a manner that has the most benefit for them financially.
If the net proceeds from the sale of their home will not pay off all of their debts, it may be beneficial for that individual to talk to a bankruptcy trustee before they use the funds to pay off part of their debt, leaving them with a remaining balance that can still prove to be a financial burden. Instead, if downsizing is the right option, they may be able to use the equity proceeds in a lump sum proposal to their creditors, eliminating all of their debts in the process. It may even be possible if the trustee is contacted early enough that they could find themselves able to downsize to a smaller home, rather than be forced out of the market altogether.
Recovering After A Restructuring
While any of these debt restructuring alternatives will appear on their credit report for a period of time, it’s important to point out to your client that they don’t qualify for a mortgage today. By dealing with their current debts, your potential client can begin the process of rebuilding their credit in order to qualify for a mortgage down the road.
Rebuilding credit can begin as soon as the client enters into a restructuring program. In the case of a bankruptcy or consumer proposal eliminating debts for less than their principal amount often results in a significant cash flow savings that can be used to rebuild their financial health. Steps to repair their credit include:
- Paying all new bills in full and on time,
- Obtaining a secured credit card in order to begin to build a new, better, payment history.
- Establishing some savings that can be used as a down payment or security for a new loan.
In most cases, individuals who declare bankruptcy or file a consumer proposal and follow prudent steps toward repairing their credit find they are able to qualify for a mortgage upon completion, after exhibiting two years of good credit history and the ability to handle at least $5,000 in new credit.
Working together, a REALTOR® and a debt management professional can have a positive impact on the long-term financial health of an individual burdened with more debt than they can handle while helping them preserve the joy of homeownership for years to come.