Consider Other Associated Costs
As you go through the mortgage process, it’s important to think about the true cost of owning a home. Besides the costs required at closing and regular mortgage payments, there are other recurring costs such as property tax, home insurance, heating costs, condo fees and more. Even though pre-approval specifies an amount you may be approved for, consider a lower principal amount to reduce regular expenses while leaving money for other unforeseen expenses.
Shop Around Among Different Lenders
While these factors are considered by all mortgage lenders, different lenders do have different rules for who exactly can qualify for financing.
Be sure to explore all of your options for different kinds of loans and to shop around among mortgage lenders so you can find a loan you can qualify for at the best rate possible given your financial situation.
What Else Do Lenders Look At When You Apply
As we mentioned, your credit score is not the only factor lenders examine before they approve or decline your application. They also want to see a favourable history of debt management on your part. This means that on top of your credit score, lenders are also going to pull a copy of your to examine your payment record. So, even if your credit score is above the 600 mark, if your lender sees that you have a history of debt and payment problems, it may raise some alarms and cause them to reconsider your level of creditworthiness.
Other aspects that your lender might look at include, but arent limited to:
- Your income
- The amount youre planning to borrow
- Your current debts
- The amortization period
This is where the new stress-test will come into play for all potential borrowers. In order to qualify, youll need to prove to your lender that youll be able to afford your mortgage payments in the years to come.
Theyll also calculate your monthly housing costs, also known as your gross debt service ratio, which includes your:
- Potential mortgage payments
- Potential cost of heating and other utilities
- 50% of condominium fees
This will be followed by an examination of your overall debt load, also known as your total debt service ratio, which includes your:
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Other Mortgage Qualification Factors
In addition to your debt service ratios, down payment, and cash for closing costs, mortgage lenders will also consider your credit history and your income when qualifying you for a mortgage. All of these factors are equally important. For example, even if you have good credit, a sizeable down payment, and no debts, but an unstable income, you might have difficulty getting approved for a mortgage.
Keep in mind that the mortgage affordability calculator can only provide an estimate of how much you’ll be approved for, and assumes youre an ideal candidate for a mortgage. To get the most accurate picture of what you qualify for, speak to a mortgage broker about getting a mortgage pre-approval.
Shop For Your Home And Make An Offer
Now that youve been pre-approved,its time for the fun part house hunting.
After visiting properties withyour agent and picking out the home you want, its timeto make an offer.
Your real estate agent will knowthe insand outs of how to structure the offer. It mayinclude contingencies that must be satisfied before the deal iscomplete.
When you make your offer, youll generally also submit your earnest money deposit.
The earnest money is a cashdeposit made to secure your offer on the house and show youre serious aboutbuying. It can be as little as $500 or as much as 5 percent ofthe purchase price or higher, depending on local custom.
Speak with your real estate agentahead of time about how large the earnest money deposit is likely to be, and beready to write a check when you make an offer especially ifyoure buying in a competitive market.
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How Not To Get Approved For A Mortgage
- Switch Jobs
Someone in long term employment looks like a more secure prospect to a lender than a borrower who has only recently started a job or changes work regularly. If youre looking to move jobs, it might be worth focusing on securing a mortgage before making the transition.
- Make any major purchases
A potential lender wants to see evidence of frugality. Hold off purchasing a car, major appliance or any expensive furniture until you secure a loan.
- Take any unpaid time off
Demonstrating that you are a reliable employee will help potential lenders see that you are a committed earner who can confidently make loan repayments.
- Open or increase any liabilities
Increasing your debt by opening any new liabilities will make you appear even more untrustworthy to potential lenders.
Ready to compare agents?
How Much Can I Afford
How much you can afford to spend on a home in Canada is most determined by how much you can borrow from a mortgage provider. That is unless you have enough cash to purchase a property outright, which is unlikely. Use the above mortgage affordability calculator above to figure out how much you can afford to borrow, based on your current situation.
Get Information From A Source You Trust
It’s natural to have questions. Besides the basics such as the interest rate and term, it’s a good idea to ask about other things like prepayment charges if you plan to sell your property or pay down your mortgage loan faster. To ensure that you get accurate, actionable information we recommend seeking answers from a trusted source. TD Mortgage Advisors are well versed in every aspect of the mortgage process and can be an easily accessible source of information.
Shop Around For The Best Mortgage Rates
With all that out of the way, its time to secure a loan. But dont let your excitement cause you to jump into a contract too soon. Choosing the right mortgage lender and loan offer requires some research and patience to ensure youre getting the best deal.
The mortgage interest rate you agree to will have a major impact on the total cost of your loan. Even a fraction of a percentage point can add up to a significant chunk of change over many years. Say you borrow $200,000 at 4.25% over 30 years. Youd end up paying a total of $154,197 in interest over the life of the loan. If your rate was 3.50% instead, youd pay $123,312 in interest, for a savings of $30,885 over those same 30 years.
In addition to the interest rate, pay attention to closing costs, origination fees, mortgage insurance, discount points and other expenses that can tack on thousands of dollars to your loan. These fees often are rolled into your loan balance, meaning you pay interest on them in addition to the principal.
Once simple way to compare the true cost of a mortgage is by examining the annual percentage rate . This is the total yearly cost of your loan once all fees are factored in, expressed as a percent of the total borrowed. However, one thing to keep in mind is that the APR assumes you will keep the loan for its entire term if you plan to move or refinance within a few years, the APR may be a bit misleading.
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Can I Get A Mortgage If My Credit Score Is Low
When we talk about minimum credit scores required to get approved for a mortgage, were talking about conventional lenders, such as big banks. These traditional lenders are usually quite stringent about their mortgage approval requirements, including the credit scores needed for mortgage approval.
There are options for bad credit borrowers who are looking for a mortgage to finance a home purchase. Credit unions, trust companies, and subprime lenders are potential sources for mortgages for borrowers who cant qualify with their banks because of their sub-par credit scores. These sources often deal with people who may be viewed as risky to conventional lenders.
Have you considered a bridge loan to help purchase the home of your dreams?
It should be noted that if you do plan to apply for a mortgage with one of these lenders with a bad credit score, you will likely pay a higher interest rate than you would if you had a higher credit score and applied with a conventional lender.
Thats why its best to consider taking the time to improve your credit score before applying for a mortgage. That way youll have an easier time getting approved for a home loan and clinch a lower rate, which will make your mortgage less expensive.
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Questions To Ask Your Lender Or Broker When Getting Preapproved
When getting preapproved, ask your broker or lender the following:
- how long they guarantee the preapproved rate
- if you will automatically get the lowest rate if interest rates go down while youre preapproved
- if the pre-approval can be extended
Ask your lender or broker about anything you dont understand.
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Homeowners May Want To Refinance While Rates Are Low
US 10-year Treasury rates have recently fallen to all-time record lows due to the spread of coronavirus driving a risk off sentiment, with other financial rates falling in tandem. Homeowners who buy or refinance at today’s low rates may benefit from recent rate volatility.
Are you paying too much for your mortgage?
Maintain Your Credit Score
There are ways to boost your home loan eligibility. Most lenders will check your CIBIL score before approving the home loan. Your CIBIL score tells how good you are with your investments, your previous loans due, and how much new loan you can repay. In order to maintain a good CIBIL score for a home loan, you need to have a clean financial record. Make sure your credit cards arent unpaid, clear off all your outstanding debt. Submitting multiple applications for home loans can affect your credit score, if they get rejected. Pick your lender carefully and make sure you only submit an application if you are sure of it being approved.
Additional Read:Your Guide to Getting a Better Home Loan Interest Rate
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Will I Qualify For A Mortgage
To know if you will qualify for a mortgage based on your current income, try our Mortgage Required Income Calculator. You will need to supply information about the cost of the Mortgage, down-payment, interest rates, and other liabilities, after which the calculator responds with the required minimum income to qualify for the loan.
Mortgage Calculator: How Much Can I Borrow
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Mortgage Approval Chances: Fannie Mae And Freddie Mac
Freddie Mac and Fannie Mae loans allow FICO scores as low as 620. They also approve mortgages with loan-to-value ratios as high as 95 or 97 percent. In addition, the two corporations will buy mortgages with maximum debt-to-income ratios of 45 percent under their standard guidelines.
However, this does not mean that you can get approved with a low down payment and a high DTI and a poor credit score. For example:
- You are eligible with a 620 FICO if you put at least 25 percent down and get a fixed-rate mortgage and your DTI is 36 percent or lower
- With less than 25 percent down, youll need a 680 FICO and a maximum DTI of 36 percent
- If your DTI exceeds 36 percent, youll need a 640 FICO with 25 percent down or a 700 FICO with less than 25 percent down
The illustration below shows the scores of approved conforming financing in December 2018 according to mortgage data firm Ellie Mae. Yes, there are approvals with FICOs below 620, but the data includes special programs like HARP refinancing that do not consider credit scoring.
Most approved loans under these programs had FICO scores over 700.
Apply For A Mortgage Pre
Most Canadians think the first step in the home-buying process is to contact a realtor and start looking at homes. This isnt correct. The first thing you should do is apply for a mortgage pre-approval. After all, if you find a home you like, youll want to move quickly. Being pre-approved for a mortgage removes an extra step in the process.
Being pre-approved also helps you know how much you can afford to spend. You can get a good estimate of how much you can afford with our mortgage affordability calculator. However, the hard limit will always be how much the bank will approve you for a mortgage pre-approval gives you that.
How long does it take to get a mortgage pre-approval? It can be done within an hour if you have your documentation together. Get in touch with a mortgage broker near you to get started.
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Determine Your Down Payment
It helps to know how much you can provide as down payment before you start looking for a home. The size of your down payment may have an impact on the amount you get pre-approved for. Plus, down payments of less than 20% of the purchase price of a home require mortgage default insurance, whereas down payments that are 20% or above may not.
Calculating The Income Required For A Mortgage
You’ve got a home or a price range in mind. You think you can afford it, but will a mortgage lender agree? Or you want to take cash out for a refinance and are not sure what loan amount you can qualify.
Mortgage lenders tend to have a more conservative notion of what’s affordable than borrowers do. They have too, because they want to make sure the loan is repaid. And they don’t just take into account what the mortgage payments will be, they also look at the other debts you’ve got that take a bite out of your paychecks each month.
- FAQ: To see if you qualify for a loan, mortgage lenders look at your debt-to-income ratio .
That’s the percentage of your total debt payments as a share of your pre-tax income. As a rule of thumb, mortgage lenders don’t want to see you spending more than 36 percent of your monthly pre-tax income on debt payments or other obligations, including the mortgage you are seeking. That’s the general rule, though they may go to 41 percent or higher for a borrower with good or excellent credit.
For purposes of calculating your debt-to-income ratio, lenders also take into account costs that are billed as part of your monthly mortgage statement, in addition to the loan payment itself. These include property taxes, homeowner’s insurance and, if applicable, mortgage insurance and condominium or homeowner’s association fees.
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Complete These Five Simple Steps To Get To The Closing
Okay. Youve found your dream home and the seller has accepted your offer. Heres what you can expect during the mortgage process, from application to closing.
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Improve Your Credit Score
That brings us to the next step. Unless your credit is in perfect shape , youll want to spend some time getting it cleaned up.
Your credit reports dont contain your credit scores. Fortunately, its fairly easy to get your credit score for free. For example, many major credit card issuers provide your FICO score for free. Other websites allow you to see your VantageScore, though you should note this scoring model is used much less often than FICO by lenders and may differ from your FICO score by quite a few points.
When it comes to the credit score needed for a mortgage, most conventional lenders consider 620 to 640 to be the minimum. Some government-backed loans will allow you to borrow with a credit score as low as 500, provided you meet certain other criteria. However, the higher your score, the more affordable your loan will likely be.
One of the best ways to improve your credit score is to make all your debt payments on time and in full. Payment historythe most heavily weighted factoraccounts for 35% of your credit score. The amount of debt you owe in relation to the total amount of credit extended to you contributes to another 30% of your score, so its best to keep your debt as low as possible.
Finally, avoid making any major purchases on credit or open new lines of credit for a few months before you plan to apply for a mortgage, as this can negatively affect the average length of your credit history and the number of hard inquiries.