Credit scores can be a tricky thing. The point of maintaining one is so companies can tell if an individual is a good person to extend credit to. However, the point behind maintaining a good credit rating is so that it is easier to get credit if one needs to. Ironically, though, a credit rating takes a hit every time a person inquires about actually using their rating to get a loan. Here is the proof: Applying for loans can cause credit score drops

BMO is strictly an "A" lender. Your credit score has likely been severely impacted with the R3 (3 months late on your credit card payment.) You don't mention when your mortgage will come up for renewal, but I'd be tempted to transfer to another institution - an equity mortgage lender would refinance all. This, however, may not be a viable solution to cover only $3,500 in debt (it may cost you penalties and legal to refinance your mortgage to eliminate this). Other possible solutions may be to get an unsecured loan from a "B" lender (eg. Citifinancial). Rates are higher but it would bring this up to date. Once this is solved, try to keep the payments up to date to repair the damage done by the R3 status of the existing credit card.

When you approach any bank or credit union for a loan, there are four tools that are used to evaluate the application in determining whether you are accepted or rejected. The same four tools are used whether the loan is secured or unsecured. The primary difference between the two types of loans is the interest rate that is charged. Generally, a lower rate will apply to a secured loan due to the collateral that is pledged in support of the loan.

The four tools that every lender will use when an application is submitted are as follows:

1. Your credit report

2. Your credit score

3. Your income

4. Your Debt-to-Income Ratio

In dealing with banks in securing personal loans, car loans and home mortgages, it has been my experience over the years that the most important tool in the bank's arsenal is the Debt-to-Income Ratio.

HERE'S WHY

You can have a ROCK-SOLID credit report with no negative information reported; you can have an 800 plus credit score; your annual income can exceed $100.000 but if you cannot meet your financial obligations as they come due or it appears to a lender that based on your income and lifestyle that any HICCUP along the way such as loss of a job, health problems or you become physically disabled due to an accident or family breakup could put you in financial jeopardy, the lender will err on the part of caution and reject the loan application.

If you are unfamiliar with Debt to Income Ratio, Here is what it is and why it matters.

A person's debt to income ratio is important because it is a representation of cash flow ---- it is the percentage of the monthly gross income that goes towards paying the applicant's FIXED expenses such as rent, mortgage payment, insurance, personal loan payment, car payment, credit card payments and many other debts and obligations.

( In business, the most important financial statement including the income statement, balance sheet, statement of net worth and the cash flow statement [ sometimes referred to as the "Where Got, Where Gone Statement ], the cash flow statement takes it "hands down". You can own millions of dollars of assets, have a strong net worth but if you have no money to pay your bills, you are out of business. I have heard dozens of reasons why people and businesses go bankrupt, but the bottom line each time is NO DOUGH. Inability to pay one's debts. )

There are two primary types of debt to income ratio used most frequently; the front-end ratio and the back-end ratio.

The front-end ratio is the percentage of income that pays housing costs. If you are a renter, the front-end ratio is the percentage of income that pays the monthly rent. If you are a homeowner, the front-end ratio is the percentage of income that pays your mortgage principal, interest and property taxes, mortgage insurance premium, hazard insurance, condo fees and homeowners' association fees.

The back-end debt to income ratio is the percentage of income that pays your recurring debt payments such as minimum monthly credit card payments, car loans, personal loans, student loans, spousal and child support payments, legal judgements, wage garnishments and other fixed expenses.

Lenders constantly use the debt to income ratio to determine whether or not you qualify for a mortgage or a loan. The DTI is often expressed using the notation x/y where x = the front-end debt to income ratio and y = the back-end debt to income ratio. For example, it is very common today, especially among banks and credit unions to require you to have a debt to income ratio of 28/36 to qualify for a loan or a mortgage. In my experience, it is not uncommon for lenders to bend the rules and exceed the 28 front-end ratio, but generally they will not budge on the 36 back-end ratio. A case in point. Several years ago, I was renting a house for $1,000 per month plus paying for all utilities and upkeep of the property. I always paid the landlord in person on the first day of every month. I was never late on my payments and I never missed a payment. I then decided to purchase a house and needed to arrange a mortgage. I approached two of Canada's major banks for a mortgage.

I presented all my financial details and income complete with credit report and credit score which was 800 plus. The banks then crunched the numbers, told me what the interest rate would be and what the monthly mortgage payment would be ( including principal, interest and taxes ). The total came in at $875 per month. I said that's no problem because I'm currently paying $1,000 a month rent. However, I was refused the mortgage by both banks. You see, my back-end debt to income was 40% and that exceeded their policy of 38% at that time. I was able to borrow sufficient funds from friends and relatives to pay down some personal debts so that my back-end debt to income ratio came under 38%. I then was able to secure a mortgage at a third major bank.

Here is how to determine your debt to income ratio. Take your yearly GROSS income and divide it by 12 months to get the monthly gross income.

$60,000 / 12 = $5,000

Take the monthly income and multiply it by the first number in the debt to income ratio requirement, i.e. .28 to determine how much of your monthly gross income is allowed for your housing expense.

$5,000 x .28 = $1,400

Multiply your monthly gross income by the second number in a lender's required debt to income ratio, i.e. .36 to determine the total amount allowed for all housing expenses and recurring debts.

$5,000 x .36 = $1,800

Debt to income ratios by most lenders do not allow for high amounts of recurring debt payments. As you can see from this example, you only have $400 a month allowance for minimum credit card payments, car payments, personal loan payments, support payments, etc.

Therefore, you have two options to improve your own debt to income ratio. You can either increase your income so you have more money to work with; or you can reduce your debts so your existing income goes further.

If you are looking to qualify for a mortgage or a loan, you'll need to reduce your recurring debts so that it falls under the lender's allowed percentage for your back-end debt to income ratio. By far, the vast majority of loan and mortgage applications are declined because the applicant does not fall within the lender's debt to income ratio.

Since your loan application has been declined either because of bad credit or more likely due to not meeting the lender's debt to income ratio requirements, you have another option called a HELOC.

HELOC is short for "Home Equity Line of Credit", also known as "Home Equity Line". HELOC is a special type of credit line, secured by the equity in the borrower's home. With the home equity line of credit, the lender sets a maximum amount that the borrower can draw, and the entire amount of the loan is not advanced in contrast to regular loans. HELOC is not to be confused with "Home Equity Loan", in which the borrower receives the entire amount of the loan upfront.

When you are approved for a HELOC, there are two important periods associated with it, which you need to be aware of. The first Home Equity Line of Credit period is the so-called "draw period", during which you can borrow on your credit line. During the "draw" HELOC period, you can borrow any amount up to the HELOC credit limit at any time. HELOC draw periods usually last between 5 and 15 years and during this time the borrower is required to pay only interest on the borrowed amount. The borrower may repay the borrowed amount in part or full during the draw period without any penalties.

There are two things that can happen at the end of the draw period. First, depending on the HELOC, the lender might require repayment of the loan in full, which means that the homeowner has to refinance at that time. The second option is entering the HELOC "repayment" period, in which case the borrower has to start repaying the principal as well.

The interest rate on a Home Equity Line of Credit is calculated daily, similarly to credit cards. HELOC interest rate is always adjustable, and in essence a HELOC is an Adjustable Rate Mortgage. The interest rate of a home equity loan is usually tied to a financial index and most HELOCs use the Prime Rate as their index. The lender will set a certain margin at the time of the HELOC approval and the interest you will be paying will be the Prime Rate plus this margin. For example, if the lender sets a margin of 2% for your HELOC, and the Prime Rate is 6%, then you will be paying 8% in total interest. Some lenders offer HELOC introductory interest rates, ( known as "teaser rates" ), which are locked in for a short period ( usually no more than a few months ), but after that, the interest will move with the index that it is tied to.

Are HELOCs risky? The short answer is yes, the HELOCs are risky. The main risk comes from the interest rate fluctuations, and the fact that the changes in the Prime Rate are almost immediately reflected in the home equity line of credit interest rate, affecting your mortgage payments. Even though HELOCs are adjustable rate mortgages by nature, there are several important differences making them riskier. You can lock the initial interest rate of ARM for as many as 10 years, while you can't do that with a HELOC. Most of the adjustable rate mortgages have interest rates adjustment caps which limits the interest rate for the borrower, while the home equity line of credit don't have adjustment caps. You should be aware that HELOC charges a yearly fee, no matter if you have borrowed something on the credit line or not.

The most important advantage of a HELOC is the fact that you pay interest only on what you actually borrow. Another HELOC advantage is the relatively low costs compared to traditional mortgages. Another positive thing about HELOC is the repayment flexibility they offer.

All major Canadian banks and some other Canadian financial institutions offer home equity lines of credit, making this financial product easily accessible

I trust that I have offered you a reasonable explanation as to why your loan application to BMO was rejected as well as providing you with an alternative.

Good Luck and have a GREAT DAY

my wife and I are trying to get a small loan to pay off a credit card that we have fallen 3 months behind in paying. We have a 250 000 home of which we own 175 000 dollars worth. (75 000 dollar mortgage). BMO, (our bank) has refused us even 3500 dollars so we can catch up. Are there any suggestions out there that may be effective for us to borrow money against our house.