Six Factors Lenders Look At When Considering Your Mortgage Application
Whether you’re considering buying or building a home, obtaining a mortgage can sometimes be challenging, depending on your credit history, employment status, and other factors. This can often lead to unnecessary stress and roadblocks.
To ensure you achieve your real estate goals, Jordan St. Pierre-The Mortgage Centre is here to help. As a mortgage expert, I have an unbeatable track record of shopping around, finding mortgage options to suit a wide variety of situations, and offering borrowing options that simply work. So, to extend some help to you as you seek a mortgage, I have compiled a list of six things lenders consider when looking at your mortgage application so that you can be prepared when it comes time to purchase a property.
1. Credit Score
When you apply for a mortgage, your lender will first check your credit score. Your credit score is determined by payment history, available credit used, length of credit history, and new credit applications. The higher your score, the more likely you will be approved for a mortgage, and the lower your interest rate will be.
Typically, a mainstream or ‘A’ lender will want to see a credit score of at least 620. However, an ideal score to get the best mortgage terms is about 750. Buying a home with a low credit score means you’ll end up paying more for your mortgage throughout the time you have your loan. This is one of many reasons why it’s essential to try to raise your credit score as much as possible before applying for a mortgage. You can do this by paying down debt, making payments on time, and avoiding applying for new credit. It can often be a few months before you will see your score increase, so it’s essential to start working on this as soon as you consider purchasing a property.
The time it takes to repair credit varies as every situation is unique. However, it typically takes about six to twelve months to see substantial change.
All lenders, no matter the type, require you to provide proof of employment. Typically, lenders want to see that you have a steady income for at least two years before purchasing your home. This allows the lender to trust that you have a stable income with which you are able to pay off your mortgage through the length of your loan.
It is crucial to keep in mind that your type of employment and the length of your employment will be scrutinized. If you are a casual or seasonal employee or have been employed by a company for only a couple of months, you may face a more significant challenge in getting your home loan approved.
If you are a self-employed borrower, the mortgage application may be a bit more complicated as there are different criteria that must be met in order to be approved for the loan. This includes (but is not limited to) personal notice of assessments for at least two years, financial statements for the business, proof that taxes are paid up to date, and documentation showing ownership and licensing.
Furthermore, it is imperative that after you put an offer in on a home and are approved for the mortgage, you do not change or quit your job. This is because the lender would have the right to retract the approval before funding the mortgage due to a change in the circumstances in which you had initially been approved.
Your income significantly affects your mortgage application. Lenders will assess your income to determine your ability to make repayments. Your income helps a lender calculate the size of the mortgage payment you will likely be able to manage.
Typically, a rough estimate of what you may be able to afford is a property value of four to times your income. However, the other criteria lenders use to assess your application will greatly impact the amount you qualify for. This number is a starting point to approximate the maximum amount a lender might be willing to loan you.
4. Debt and expenses
Lenders look at two ratios to determine the amount you can borrow as your expenses affect your mortgage affordability. That is an estimate of what a borrower could reasonably pay back compared to their income, monthly payments, and current debt.
The Gross Debt Service (GDS) ratio is the percentage of your monthly household income that covers your housing costs. It should be at or under 35%. They may also evaluate your application with the Total Debt Service (TDS) ratio. This is the percentage of your monthly household income covering your housing costs and other debts. It should be at or under 42%.
To calculate your GDS/TDS, add up your monthly housing expenses (and all of your monthly debts for TDS), multiply by 12 to get the total amount for the year, and divide that number by your annual salary. Then multiply by 100 to get your GDS or TDS ratio. This will give you a reasonable estimate of whether you need to cut down on expenses to qualify or if you might have some wiggle room for this criteria.
It is important to keep this in mind if you are considering purchasing a property, especially with larger purchases such as a vehicle, etc., as these larger monthly payments tend to impact your borrowing power the most.
5. Down payment
Generally, lenders want you to put down 5 to 25% of the price of your home. This is so that you have some equity in your house as you’re making your monthly payments. The amount you put down upfront on your house also determines how much interest will be calculated on your mortgage and your interest rate.
Bigger down payment may show lenders that you have the financial discipline needed for a mortgage. Most lenders want to see at least 5% of your deposit coming from savings you have held in your account for at least 90 days. However, a down payment can also come as a gift, provided it is from an immediate family member and is not a loan. If your deposit is less than 20%, you have to pay for Canada Mortgage and Housing Corporation (CMHC) insurance which covers your lender if you default on your mortgage.
In general, you need the following amount for a down payment:
• For properties up to $500,000, the minimum down payment is 5%
• For Properties amounting to more than $500,000 but less than $1 million, the minimum down payment is 5% of the first $500,000 plus 10% of the remaining balance
• For properties $1 million and above, the minimum down payment is 20%
6. Value and condition of the property
One thing buyers often don’t realize that affects the outcome of their mortgage application is the value and condition of the property they want to purchase. Lenders want to see that the home’s value is in line with the purchase price – that is, the mortgage amount will not exceed what the house is actually worth. Lenders carefully assess the type of property you wish to buy in terms of location, nature, size, and title and often require an appraisal to determine the value. This is because if you default on the mortgage, the lender would then sell the property to retrieve the money you owe. By not lending more than the property is worth, it ensures that they would be able to recover the total cost of the loan.
Lenders also want to be sure that the home is in good condition. This protects both the buyer and the lender from any unforeseen problems with the property, which could cost a lot to repair and significantly devalue your home’s value. It is also to ensure the property is safe to live in. A home inspection is recommended to highlight any major problems (especially ones invisible to the naked eye). It is often used as a negotiation tool with the sellers if any repairs are needed before they hand over possession, usually in the form of a price reduction or completed reparation, both of which affect the mortgage application.
For more tips on how to go about getting a mortgage, reach out to me at Jordan St. Pierre-The Mortgage Centre.
I have been providing mortgage financing solutions to the greater Edmonton area since 2013, and my goal has always remained the same - to ensure that every interaction is a positive experience for my clients. I provide clients with financing solutions that are tailored to their specific needs, goals, and future plans. Whether purchasing, renewing, or refinancing, I take an unbiased and honest approach to mortgages that leaves nothing to chance.