Are you in Debt, or Defaulted Debt?
If you’re wandering around your rented apartment or house and sighing about how you’ll never get a mortgage, take a second to stop and ask yourself why. Making the move from a renter to an owner is the dream that many renters are trying to attain. But so many stop themselves before they even begin because they think they simply have too much debt. And that debt is going to prevent them from getting a mortgage. But will it really? To get the answer, you need to know whether you’re in debt, or defaulted debt.
A study by TransUnion last week showed that Canadians have, on average, $25, 603 of debt per person, excluding mortgages. However, many of these people also hold mortgages. So how did they become eligible for a mortgage while they carried so much debt? Doesn’t debt equal no mortgage, automatically? Well, no, not usually. The problem that people run into when they’re trying to get a mortgage is not that they are also carrying some debt. It’s the fact that they are carrying defaulted debt – and there’s a big difference.
So you have a credit card, or a student loan. Your bill comes in the mail every month and you pay the minimum balance like the good borrower that you are. This is debt. Nearly everyone has it, nearly everyone is trying to get rid of it. You will too, and you shouldn’t worry about those monthly bills affecting your ability to get a mortgage. However, if those bills come and you don’t pay the minimum balance or worse, you haven’t paid the minimum balance for months, then there’s a problem. The problem is that now you’re not only in debt, you’re in defaulted debt. And that’s much worse than just owing some money to a couple of people.
The problem with defaulted debt is that it shows that you have not paid one (or more) of your debts for some time. This looks even worse to lenders because it shows them that you’re a high risk and that you’re likely to go into debt and then forget about it, never worrying about paying it off. And that’s much worse than simply borrowing money that you’re now paying back. So, what can you do about defaulted debt?
In simple terms, pay off the debt. While this may sound far easier than can be done, you can do it! Start by calling around to your creditors and getting both a lower interest rate and an agreeable payment arrangement. Make sure that whatever the payment arrangement is, that you can afford it! Defaulting on the new arrangement will do you even more harm than good, so however much negotiation it takes, make sure that the new arrangement is one that you can afford.
Once you have that in place, you can then start paying it off. Don’t worry about how long it will take you; as soon as you start paying that debt off, it will come out of default status and will be an account in good standing – that’s really all you need to be eligible for a mortgage. But. Lenders will want to see not only that you’ve made arrangements and are paying it off, but also that you can pay it off over a period of time. Usually, that time is one year but if your defaulted debt has been going on for a long time, or is a very high amount, some lenders might require that you pay off that debt for two years before they consider you for a mortgage.
So if you’re in defaulted debt, get on the phone and start talking to those creditors right away – it’s the first, and most important, step you’re going to take in order to be eligible for a mortgage loan.