House hunting can be a challenge in itself, but what about qualifying for a mortgage?  What do you need to know to get or even qualify for a mortgage?

A mortgage Pre-Approval is an important first step in getting a mortgage for 2 reasons:

  • The pre-approval gives you a good idea of what mortgage size you can afford.
  • The pre-approval will hold a rate for up to 120 days, thus protecting you from any sudden rate increases.

The five factors that count the most when lenders are deciding whether you qualify for a mortgage loan are:

  • Your income
  • Your debts
  • Your employment history
  • Your credit history
  • Your identity
  • Your property value

When you understand how a lender will judge your loan application, it is easier to see your own strengths and weaknesses as a loan applicant.

A strong loan application will have these features:

  • A housing expense ratio no greater than 32% (Now optional) (the lower the ratio, the better)
  • A debt-to-income ratio no greater than 44% (the lower the ratio, the better)
  • The home buyer has steady income – ideally, the same job for two years or longer
  • The home buyer has good credit (bills have been paid on time)
  • The house is worth the price the buyer is paying

Your Income

One of the first questions a lender will consider is how much of your total income you’ll be spending on housing. This information helps the lender decide whether you can comfortably afford a home. If the house payment represents a large portion of your income, you’re more likely to have trouble making these house payments because of your other potential expenses (such as car, furniture etc.). On the other hand, if the house payment is a small portion of your income, chances are better that you can truly afford the house.

When you’re applying for a loan, the lender will look at your ‘gross income’. Your ‘gross income’ is all the money you earn before taxes, including overtime, commissions, dividends and any other sources. You must be able to show a steady history for these sources. For example, many lenders will count income from a part-time or seasonal job as long as you can show that you’ve had the job for at least two years.

One important thing your lender will do is compare your housing expenses now to the expense you’ll have if you buy a home. The smaller the increase, the stronger your application looks.

Your Debts:  In addition to your income, a lender will look at your debts. Generally your debts include your house payment as well as payments on all loans, charge cards, child support, etc. that you make each month.

If you’re overloaded with debts, perhaps taking equity from your home to consolidate your debt is a viable, cost saving option.

Your Employment History:  You don’t need to be wealthy to qualify for a mortgage, but a history of steady employment in any occupation helps. Lenders are more likely to lend money to people who have worked for several years at the same job, or at the same type of job. However, if you’ve only been in your current job a short while, this won’t necessarily stop you from getting the loan, as long as you’ve had regular income over the last year.

The lender will check your employment; usually by asking you for a letter from your employer which is signed and states how long you have been on the job and how much money you earn. If you’re self-employed, or if you’ve been at your job less than two years, the lender may ask you for additional information (such as federal income tax statements) concerning your income and work history.

Some key questions a lender considers when reviewing your loan application:

  • Have you been at the same job for at least two years?
  • Have you been in the same occupation for at least two years?
  • Have you had gaps in your income over the last two years?
  • How long do you expect to stay in your current job?
  • Is the co-borrower (if any) employed?
  • If either you or the co-borrower lost your job, how long would you be able to make your mortgage payments?

 

Your Credit History:  Good credit is very important in qualifying for a loan. In addition to your ability to pay (as indicated by your debts and income), a mortgage lender will look at your willingness to pay. This will be judged by your credit record – that is, how well you’ve paid your loans and other debts in the past.

When you apply for a loan, the lender will order a credit report for you. It’s a good idea to order a copy of your credit report before you apply. It will show your record of payments on loans, charge cards and other similar debts. If you’ve never had a loan or a charge card, you can show that you have a good record of payment on your utility bills and rent.

Your Property’s Value: When you choose a home, the lender will want to know that the house is worth the price you plan to pay. In fact, the loan amount that the lender approves for you will be based on the value of the property. The value of the property is a lender’s best assurance that they can recover the money they lend you – even if you stop making mortgage payments. If you stop making payments, the lender has the right to sell your home to pay off the loan – a process called “foreclosure”. The lender wants to know that the property could be sold at a price that’s worth the loan amount.

If you decide to sell your home before you’ve finished paying off your mortgage loan, you’ll want a price that allows you to pay back the loan balance (and perhaps make a profit as well). That’s why it’s important to have a professional appraisal of the value of your home.

Your Identity: Identity theft is a growing problem in Canada for both individuals and for lenders. To make sure no one is falsely using your identity to borrow money for a home, photo identification is becoming the norm. Mortgage Brokers may also ask you some questions about your credit history to confirm the information that’s on record at the credit bureaus

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