In the mortgage and other credit industries, I often find that clients who are very successful still have to pay high rates. Some of my clients don’t understand why and for this reason I think it’s worthwhile to teach you about how lenders evaluate risk and expect to be compensated for it, with higher rates. I’ll break down a few different archetypes of clients that need to pay higher rates.
The Classic Poor Credit
The classic poor credit client is someone who has not paid their bills in a timely manner, declared bankruptcy, or has been denied credit more than once due to high obligations as compared to their available credit. Institutional lenders need to charge these clients a higher rate to ensure that they are compensated for the additional risk presented by a client who has a history of not paying in a timely, comprehensive manner. The threshold for many lenders is about 640. If you are below the line, you have to pay a higher rate, and are often not offered options with your mortgage unless you pay an even higher rate.
The Self-Employed Tax Evader
A lot of successful self employed individuals including lawyers, consultants, dentists, accountants, and construction contractors, have to pay higher rates on their credit. Why? — They don’t like to pay taxes. Who does? As a self employed individual with stellar credit, many people try to expense everything they possibly (and legally) can in order to claim that they have the lowest possible taxable income. Some of the things you can write off include meals (with clients*) gas, rent for a home or office, supplies, gifts for clients and more. Some lawyers make less than $40,000 per year on paper. It is because people show such little income that when they want to buy that $800,000 home in Toronto, their bank refuses to give them financing at a low rate. Banks are handcuffed by their strict borrower profiles, which is why many of these clients head to mortgage brokers to sort out their home financing.
The Newly Employed or Promoted Homebuyer
This poor fellow is simply guilty of not making enough money for a long enough time. I have a friend who quit his high paying IT job to work as a consultant. He is making more money than he was in the past BUT, since he is now self-employed (and expensing a lot) it looks like he doesn’t make the big bucks anymore. If you just got a raise, or work in an industry where your 2nd and 3rd years are going to bring you significantly more income, you may find yourself not being able to borrow enough money to buy your home. When your employment is in flux, you’ll have to pay a higher rate to justify a lender taking a risk on you. What if you lost your new job at your higher rate of pay? How would you make your loan payments?
These are just some examples of clients who need credit and mortgage advice. I hope you learned something here, and am always available for further explanation in the comments.
Stay tuned for more finance.