Having trouble understanding how to get approved for a mortgage? Check out our tips on how to have the most success on approval of your mortgage and buying your dream home.
Tip #1: Check your credit score
Checking your credit score gives you an overall picture of your financial health. It allows for financial trustworthiness and to show that you are able to repay your debts. The higher your credit score, the lower your mortgage rate; the ideal score is 660. Equifax and Transunion are the two credit bureaus available in Canada.
Tip #2: Save a larger down payment
Purchasing a property, whether it be personal, commercial, or even for investment purposes, having cash upfront (aka down payment); the more you provide as a down payment, the less you need to borrow and the less interest you will have to pay. If you put down less than $500,000: the minimum down payment is 5% of the purchase price; if you put down $500,000 to $999,999: you will need 5% of the first $500,000, and 10% for the portion of the purchase price above $500,000; if you put down $1 million+: 20% of the total purchase price. If you put less than 20%, you will need mortgage loan insurance; paying the premiums is the monthly payment. You can do the calculations yourself as well by using a mortgage payment calculator.
Tip #3: Keep your income stable
Having a stable income proves that you are able to make payments, so keep your day job! If you are applying with a partner, having both you and your partner with full-time jobs is an asset. If you do not have a full-time job, have no fear! Try to find a part-time job during the mortgage application process as it helps your case. Having a mortgage with a low rate can save you thousands of dollars!
Tip #4: Paying down existing debt
If you have existing debt whether it be student debt or even credit card debt, minimizing it would be to your advantage. Having existing debt makes it difficult to get approved as mortgage brokers look at debt-income ratios in order to determine your status. Credit cards, lines of credit, or student loans don’t necessarily need to be at $0, but it does impact the amount you will be allowed to borrow.
Tip #5: Get a mortgage pre-approval
Pre-approval helps you determine the home price you can afford, allowing you to budget for your home purchase and focus your home search; it also saves you from rate increases during your search. Applying for a mortgage is FREE! You do not have to commit to a lender but it is beneficial as it helps keep the rate for a specific amount of time. Your lender evaluates your financial situation, sets a mortgage amount, income rate, and term. Preapprovals are valid for 90-120 days; this allows you to house hunt within your budget and can move quickly to put in an offer. Factors that are needed in order to get pre-approval are credit score, down payment, debt services ratio, and supporting documentation.
Tip #6: Get a great rate
The best practices to follow in order to get the best rate is to shop around or use a mortgage broker. Having a good rate means that your monthly payments will be less and would allow you to borrow more. The advantages of using a mortgage broker in Canada are: free consultations, personalized advice, all negotiating and paperwork are done by the broker, brokers have extended hours as they work independently, can source a mortgage from multiple lenders and they have a broad view of the mortgage landscape.
Tip #7: Know what you can afford (and what you cannot)
Keeping in mind that your financial status can be affected by expected mortgage payments, living costs, debt repayments, and other financial obligations. Only you know what you can afford whether it be childcare, groceries, or even supporting your parents; your future plans can change your financial situation with the snap of your fingers. When calculating what you can afford, factor in the other purchasing costs, like home inspections and closing costs (usually about 3-4% of the purchase price). Remember you would still need to pay for property taxes, repairs, maintenance, and utilities. Try not to spend every dollar that you receive and take into consideration what you can actually afford.
The above are general tips on how to have the best success in obtaining a mortgage. Remember to keep an eye on your credit score, have a down payment; the more you have the better it is for you, have a stable income, pay off some of your existing debt, get pre-approved, get a good rate; using a broker would be your best option and know what you can afford.