It’s not every day that you apply for a mortgage so the process may seem a little daunting. Before you start house-hunting, securing a pre-approved mortgage can be helpful. You will be more confident about what you can afford and you will be able to make an offer more quickly when you find your dream home. Lenders assess your application based on the following things.
Credit Score
This is a three-digit number that is based on your history of repaying loans and paying your bills. Credit scores range from 300 to 900. If your score is 650 or above, you are said to have good credit rating while 750 or higher reflects an excellent credit rating. Past due bills, bankruptcies and mortgage foreclosures will all negatively impact your credit score. With an excellent credit rating, you may qualify for the best mortgage interest rate available.
Down payment amount
A healthy down payment will improve your chances of being approved for a mortgage. Expect to come up with 20% of the purchase price of the property. Otherwise, you will have to purchase mortgage insurance.
Total income
The lender will need to see verification of your employment and proof that you have enough income for your monthly bills and living expenses. Recent pay stubs can prove your current take home pay and year-to-date earnings. Depending on your situation, you might be asked to show your tax returns for the past few years. This can be used to demonstrate income stability if you have changed jobs frequently, profitability of your business if you are an entrepreneur and indicate other income such as alimony payments.
Housing costs
What you can afford in housing is calculated using another formula. The gross debt service ratio refers to the percentage of your gross monthly income that is needed for housing-related costs. This covers your mortgage, property taxes, utilities and (if a condo is involved) 50% of the condo fees. Generally, this should be no more than 32% of your gross income every month.
Current debts
Mortgage financers use something called your total debt service ratio or debt coverage ratio to determine what percentage of your gross monthly income goes to paying down your debts in addition to your housing costs. This includes car and student loans, personal lines of credit, credit card payments, child support and any other debts. This helps lenders judge how much additional debt you can take on in a mortgage. As a rule, your debts should account for no more than 40% of your gross monthly income.
Finally, you will need to pass a mortgage stress test to confirm that you qualify for a mortgage at the current lending rate plus 2% or the five-year benchmark rate set by the Bank of Canada, whichever is greater. This is to make sure that you can still carry your monthly payments if interest rates are higher when it’s time to renew your mortgage. If you are looking for a mortgage broker, I would be very pleased to make a referral.
Finally, you will need to pass a mortgage stress test to confirm that you qualify for a mortgage at the current lending rate plus 2% or the five-year benchmark rate set by the Bank of Canada, whichever is greater. This is to make sure that you can still carry your monthly payments if interest rates are higher when it’s time to renew your mortgage. If you are looking for a mortgage broker, I would be very pleased to make a referral.