Advanced Financial Planning - Quiz 1.docx

Only for people who have high portion of equity in

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Only for people who have high portion of equity in their home & good income Qualifying for a Mortgage - 2 criteria 1. Quality of the property as security Appraisal of the property 2. Borrower creditworthiness 5 C’s Mortgage Approval: Gross Debt Service Ratio - = Housing Costs / Gross Annual Income - =( Principal + Interest + Taxes + Heat ) / Gross Annual Income - Approval percentage depends on lender: usual maximum GDSR 25 up to 35% - Mortgage Pre-Approval Interest rates are guaranteed for 60-90 days Total Cost of Home
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- Main Goals Largest possible down payment Shortest amortization period affordable Lowest interest rate Debt Management - Most effective use of available funds Use interest free period on credit cards, source of “free money” Pay down high interest and non-tax deductible debt first and as quickly as possible Within risk tolerance, convert non-tax deductible debt to tax deductible debt Over Indebtedness - More debts than one can or is willing to repay - Causes: Excessive credit usage Loss of job or income & inadequate emergency fund Unforeseen large expenses Poor financial management and dispute with creditors In Arrears: Debt Collection - Lender attempts to collect money owed as quickly and cheaply as possible Send notices and reminders Internal collection try to collect overdue accounts Third Party collection agencies collect overdue account for others - Use the Courts to Collect Debts If collection procedures and repossessing security do not cover the debt Possible Outcome of Court Actin 1. Borrower does not owe the money and the case is dismissed (hardship cases) 2. Borrower owes some or all of the money Seize some of the borrower’s goods under an execution order Family Court Garnishee on wages, when support payments not up-to-date Last Resort: Insolvency - Liabilities greater than assets - Less than $250,000 in debts, excluding mortgage on principal residence - Apply for insolvency protection under the Bankruptcy and Insolvency Act - Prepare & Distribute a Consumer Proposal Consumer Proposal - 5 year plan for paying creditors all or a portion of the total debt owed Both the court and creditors must agree to the consumer proposal Removed from the credit bureau report once the consumer proposal terms have been met
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- Protects debtor against discontinued utility services, accelerated payments, employer retaliation due to the proposal Personal Bankruptcy - Allows an insolvent borrower to obtain relief from a financial crisis - Assets of the insolvent, if any, are distributed in an orderly fashion among creditors Secured creditors paid first - Does not eliminate all debt: Not released: student loans, alimony, family support, fines, penalties
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